Breakups between small entrepreneurial FinTechs and large financial institutions too often follow predictable but avoidable patterns. Common parting words:
From the FinTech: “You’re too complicated.” “Why haven’t you called me? We were great for the first several months and then you started to pull away. I don’t understand.” “You can’t commit – you say one thing, and then you drag things out.” “Your ‘complexity’ is highly annoying – I don’t really give a *#_%^ about all your layers. So sorry I can’t satisfy everything on your ‘CHECK-list!’ “
From the bank (or asset manager, or insurance company): “I know you say I’m ‘needy,’ but I just can’t take a flyer with someone so unsophisticated.” “You’re risky – and you’re so blind, so immature – you don’t even understand how risky you are!”
Fortunately, the dating scene has evolved. First, industry players have created organizations and other mechanisms to produce better matches and foster more enduring, successful partnerships. More on these developments below.
Second, FinTechs and financial institutions are taking steps to alter established, entrenched practices which doomed such relationships from the outset. The crux of the problem: Most small FinTechs neither understand nor have in place all of the risk and compliance practices required by their highly-regulated partners – i.e., FinTechs aren’t “enterprise ready.”
On the flip side, large financial institutions have rigid third-party onboarding and assessment programs – not unreasonably so, given the vast improvements to risk management since the financial crisis. However, these processes are not adaptable to accommodate FinTechs with small staffs and immature risk and compliance programs – i.e., financial institutions are not “start-up ready.” (Ask a FinTech whether it has ever received an overwhelming due diligence request list, with no guidance as to what’s important, left pondering questions about the firm’s “significant mining interests” – as in coal-mining… I’m not making this up.)
Bringing Together Partners to Form Good Matches
Before addressing how FinTechs and their financial partners are working together more effectively, how do they meet?
Company-created accelerators or innovation labs, where the corporate works directly with and then typically takes equity in a FinTech, are not a new concept; many have proven successful in driving solutions for that specific company. Innovation labs vary in how they operate, but they usually provide an open physical space for early-stage start-ups to access company hardware and data and collaborate with company management and often customers to test new technologies.
Recent industry developments include efforts to bring together larger and broader groups of participants from both sides. For example, MassChallenge FinTech (“MCFT”) matches enterprise-ready FinTech startups with the program’s corporate sponsors to drive innovation. Who are the sponsoring partners? They range from traditional financial players such as Citizens Bank, Fidelity Investments, investment manager Columbia Threadneedle, and Eastern Bank (the oldest and largest mutual bank in the U.S.) to other entities interested in financial innovation such as Walmart and AARP.
MCFT partners broadcast “reverse pitches” to the FinTechs – i.e., “Here are our problems. Who among you can leverage your business, platforms, expertise and know-how and provide solutions?” The FinTechs then make their pitches to the partners, the whole process somewhat akin to speed-dating but with more engagement and without the frenetic rush. After numerous rounds of judging, finalists are selected (the 2019 cohort has 21) to work directly with one or more sponsors to tackle their challenges and ultimately create long-lasting, outcome-driven relationships. (Disclosure: I’m an expert advisor to MCFT on financial services risk, a mentor to its start-ups, and a big fan.)
In another example of numerous institutions working collaboratively, in November 2018 twelve community and regional banks formed a consortium called Alloy Labs Alliance as a platform to identify shared areas of opportunity and partner with small FinTechs. Alloy Labs establishes small working groups to conduct deep dives on specific pain points or opportunities, screens potential FinTech partners, and develops and shares best practices among Alloy Labs’ member banks. The clear economies of scale from this “consortium approach” benefit these banks, ranging from $250 million to $20 billion in assets, which don’t have massive innovation and IT budgets.
Understanding Each Other’s Needs: Enterprise and Start-Up Readiness
Given the increased engagement of small FinTechs and financial institutions in the programs above, how are firms overcoming their respective inherent flaws which have doomed such courtships in the past? How are FinTechs better positioning themselves to be “enterprise-ready” and to address the third-party risk requirements of the financial institution? And how are financial institutions altering their practices and corporate behaviors to be “start-up ready”?
MassChallenge FinTech, with partner and local non-profit FinTech Sandbox, spent a good chunk of its two-day mid-program “FinTech ReFuel” addressing these questions a few weeks ago. These topics were discussed also at the Risk Management Association (“RMA”) Governance, Compliance and Operational Risk Conference in April. Below are some key observations, best practices, and lessons learned.
Fin-Tech Enterprise Readiness
1. Know the Basic Requirements
First, although every engagement presents unique risks, enterprise-ready FinTechs are familiar with the standard requirements of financial institutions – incident management, business continuity, and financial stability to name a few.
(For FinTechs with no idea of what is required of them – hate to say it, but you’re not ready for primetime. There are numerous resources on third-party requirements for banks – a good one is the book, “Third Party Risk Management: Driving Enterprise Value,” by Linda Tuck Chapman.)
2. Have a Plan to Meet the Requirements
Although most small FinTechs have reasonable deficiencies, commentators at both the MCFT ReFuel and RMA Conference noted that firms with remediation plans in place were much better positioned for ultimate long-term partnership. “Strong compliance puts you at a competitive advantage!” As one bank said, better to have a “plan for a plan” rather than demonstrate cluelessness when the request arrives.
3. Be Laser Sharp on What Happens with Data
FinTechs aspiring to deal in any way with financial institution data should have a command of relevant privacy and information security laws and requirements (e.g., state laws, GDPR, other emerging “right to be forgotten” legislation). As 65% of data breaches occur through vendors, you (as an aspiring vendor) should be prepared to address the financial institution’s general nervousness around letting you near the data.
As one bank said, I want the FinTech to always be able to answer: What data do I have? Where is it stored? Who has access?
4. Know What Happens with Every Click
And, whether dealing with data or some key process, the financial institution wants and needs assurance that the FinTech “knows what happens with every click.” Financial institutions are on the hook for their service providers’ actions. Enterprise-ready FinTechs document their processes – no need for a detailed process map, just a clear, simple step-by-step description which your grandmother could understand, which gets us to the next point….
5. Communicate Clearly to “Non-Techie” Clients
A chief compliance officer of a financial institution observed that bankers and especially their senior key decision-makers are often, well… older than your typical FinTech leader. While she readily admitted the statement is a sweeping generalization, one needed only to glance at the audience representative of the industry for a resounding confirmation. And with the generational gap comes a gap in technological understanding, the peril of which FinTechs should not underestimate.
The compliance head reiterated that FinTechs should explain complicated problems and solutions in clear, non-technical terms to overcome the bank senior leader’s uncertainty. Bankers by nature are detailed-oriented and logical; they are also risk takers. But, quite often, opportunities get quashed because the financial institution does not simply (let alone fully) understand the problem and the proposed technological solution – because they were not communicated in a way a 60-year-old, risk-averse, senior leader who is not a “techie” was able to understand.
Financial Institution Start-Up Readiness
Bureaucracy is the killer of this process at big financial institutions. Bringing in an innovative partner often requires senior leader buy-in from the business, technology, operations, procurement, legal, risk and compliance teams. This onboarding process is engineered to manage third-party risks in a highly matrixed, complex organization. But of course, the design does not accommodate the relative immaturity of small FinTechs, who feel like contestants in Survivor trying to make it to Day 40.
If it were only 40 days. Often the initial courtship staggers into a second year with no full commitment. As Margaret Thatcher said (in a different context), “Good intentions are not enough. Sometimes you need hard cash.” And, if you’re a small FinTech, chances are your cash flow, sales cycle and business model are not built around a non-committal, lumbering primary customer who needs “only two more approvals.”
That protracted process can be fatal. (MassChallenge FinTech’s six-month-long, outcomes-driven approach was partially born out of this observation.)
Financial institutions which have successfully partnered with small FinTechs have adapted some of the following best practices to be more start-up ready.
1. Ensure Organizational Buy-In
First, the executive who is the champion ensures the financial institution has “organizational buy-in,” which is nothing short of engagement and commitment from all relevant senior stakeholders in the company from the outset. And (this is critical), the buy-in from each stakeholder isn’t just conceptual; it’s comprised of commitments to a roadmap or timeline of expected milestones and actions by the stakeholder who will be held accountable. The FinTech should request and the financial institution should share this plan.
2. Make Due Diligence More User Friendly
Second, start-up ready financial institutions have taken various steps to simplify the standard, lengthy third-party due diligence request. This does not mean bending on the risk profile and lessening or loosening the compliance and risk requirements of the third-party FinTech. Rather, it can be as simple as adding a single cover page that provides guidance as to which requests are of higher priority or, for any specific request, guidance on how the request may be satisfied. After all, the financial institution should want the FinTech to be able to meet its requests, right? Dropping the due diligence bomb with no evidence of any effort to assist sends the message that, good intentions notwithstanding, this journey may be a slog and the “partnership” more one-sided than initially communicated.
3. Assist the FinTech with the Request
Third, in addition to enhancing or simplifying the due diligence docs to make a bit more user friendly, some financial institutions go further by – get this – actually sitting down with the FinTech to help them understand and compete the request! For example, Radius Bank, a 2019 MCFT partner, is a $1.2 billion-asset digital bank that strategically embraces partnering with FinTechs. Radius provides a single-page summary of due diligence requirements and then typically meets with the FinTech three days later and reviews the request list.
Radius answers questions as to why it may be asking for certain info and also provides guidance on how to satisfy some of the requirements (e.g., how to get a required certification). The bonus: FinTechs want the business and they want to be good partners, so this hands-on level of engagement usually motivates them to go the extra mile to make sure they get it done right.
4. Be Easy To Work With
(Guess what? FinTechs know which financial institutions are easier to work with. Don’t you wonder what they’re talking about at all those meet-ups? Umm… that would be you.) Financial institutions should be concerned about their reputations as being difficult to work with. Although historically the financial institutions have held stronger bargaining power, these days many FinTechs have the insight and ability to be selective when choosing a partner. For some of the founders and leaders of FinTechs, including those that are early-stage, this is not their first rodeo.
The practices above are not rocket science. They’re not revolutionary. In fact, they’re pretty much just common sense. At their core are two simple reciprocal attributes of any strong relationship: first, communicate one’s needs simply and clearly; second, demonstrate commitment to meet the other’s needs.
That said, organizational inertia can be hard to overcome. Numerous participants in the MassChallenge FinTech Refuel and RMA Conference touted the benefits of organized programs such as MCFT or any consortium or sandbox where you can learn from others. Far easier to follow the trailblazers than to be the first one hacking your way through.
And, as one general counsel noted with a final word of advice: Don’t make breaking up hard to do. Make sure you go into the relationship with the equivalent of a pre-nup.
Mark duBose is a senior financial services executive with experience building out, remediating, and right-sizing risk and compliance functions in financial services businesses ranging from $1 billion to $100+ billion in assets. Prior to the financial crisis, he spent many years advising mid-sized firms as a corporate lawyer and investment banker. Mark Hill is a professional cartoonist and illustrator for advertising, business and publishing. His works have been published in over 200 magazines and newspapers, including the Atlantic, Forbes, Time, and the Wall Street Journal.