Why partnerships between banks and fintechs fail and how to prevent death’s embrace

Coined by MIT researcher Alan Thorogood, the term “embrace of death” refers to a situation in which the mismatch between banks’ and fintechs’ priorities and relative velocities leads to fintechs over-indexing their resources and failing to achieve their strategic goals.

Fintech companies thrive when they move quickly and through “consistent growth in customers, funds and transactions, which in turn facilitates the raising of capital and the expansion of their products and operations,” says Scott Simari, principal at Sendero Consulting.

However, banks are moving slowly because they need to maintain compliance, manage risks and prevent product cannibalization, Simari said.

“It’s the endless errands, meetings, toll booths and reviews, often a lot of activity and strain on fintech resources without significant productivity. From a fintech perspective, it’s an opportunity cost problem; the time and resources spent on support the financial institution could be better used to achieve its strategic objectives,” he said.

There’s a lot to be said about the benefits of bank-fintech partnerships and how they can drive the financial sector toward innovation. There’s also a lot that can go wrong.

Lots of talk, no money

For banks, one of the worst things that can happen with partnerships is investing in a relationship with a fintech company that bears little fruit. For example, loan productivity and loan volume are top priorities for banks seeking partnership with fintechs, but only 28% of banks report seeing an improvement of 5% or more in these areas, according to research.

Source: Cornerstone Consultants

Collaborating effectively is difficult: Banks must spend a lot of time vetting potential partners and then integrating their technology into their core and ancillary systems. Beyond technical issues, internal bank bureaucracy can also delay market timing.

This barge-like movement may result in delays or inferior results for the bank, but for the fintech it can be akin to a death sentence.

Partnership processes to pay attention to

1) The Compliance Maze: For banks, compliance is an unloved but necessary part of their operations, meaning a fintech can find itself spending much of its time ensuring it meets standards and, conversely, less time spent on activities that will help the fintech grow. “Raising capital is intense; eighty percent of my time is spent on that,” one fintech founder told Thorogood when researching him.

2) Regulatory farce: “Large institutions’ stringent regulatory requirements and risk management protocols can disproportionately consume fintechs’ resources, leaving them with limited bandwidth to innovate and iterate on their platform,” Simari said.

These processes not only take time away from capital raising capabilities, but also leave fintechs with limited resources to invest in improving their offerings. This stagnation can be dangerous especially if the fintech collaborates with a very large and well-recognized bank. “A fintech can risk having its identity overshadowed by that of the financial institution, resulting in a loss of autonomy and strategic direction,” he said.

How to Avoid the Embrace of Death

The embrace of death is not good for either partner. While the bank may initially benefit from the fintech dedicating a large chunk of its resources to the relationship, the stagnation that the fintech may experience as a result of this impacts the benefits a bank can reap in the future. Avoiding a partnership that requires excessive effort like this is the best policy:

1. Start independently first: Partners can consider standalone launches rather than diving in and integrating products with enterprise platforms. “This approach facilitates rapid market entry, allows for easy assessment of value and allows for direct separation if necessary,” Simari said.
2. Keep your scopes under control: The deadly embrace is more likely to occur if the scope of the partnership increases very rapidly, which leads to “dependency on various business functions,” he said. Expanding the mandate of the partnership may cause delays and internal conflicts, as well as increased costs for the IF. Therefore partnerships should start small and with clear objectives from day one.
3. Set boundaries: Fintechs should clearly define the relationship, distinguishing whether they are strategic or transactional partners, according to Simari. This allows both partners to begin the value matching process early in the agreement and mitigates any risk of the relationship becoming too much for any partner to bear.

“Transparency from fintech companies about their current capabilities is essential to avoid the temptation to overstate future product developments,” Simari said.

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