Strategic Partnerships in Fintech: Navigating Granular Competition
Strategic partnerships have always been a core part of the fintech industry. As fintech develops, strategic partnerships face more granular competition. Fintechs and banks have always relied on strategic partnerships to divide risk and increase growth, but competition is heating up. Strategic partnership between banks and fintechs are increasingly granular. GlobalData’s new Strategic Partnerships in Fintech (2024) report sheds light on the emerging and upcoming trends in the sector.
Defining Strategic Collaborations
According to the report, “’Partnership’ has become a catch-all term for a wide variety of different collaborations, which could be as ‘light’ as a referral agreement with a non-traditional SME lender, to ‘heavier’ solutions like white labelling the underlying credit risk capabilities, to co-development of the overall platform, to outright acquisition.” For example, a bank may start initially with a simple referral link to a non-bank SME lender in the event that the incumbent is unable to extend financing. Then over time it might incorporate part of the fintech’s credit engine, license the whole proposition, or acquire the solution and the human capital (known as ‘acqui-hiring’).
This model allows banks to get to grips with software solutions before pursuing a takeover, theoretically reducing alignment time and reducing the risk of major restructuring for the fintech. Banks can provide fintechs with much-needed legitimacy and a steady stream of income, and, in return, the banks can expand into new areas of finance without the financial risk of building the teams in-house.
Granularisation in the Value Chain
At an industry-wide level, key factors encouraging new partnerships between fintechs and traditional banks include regulatory alignment, increased funding costs and the rapid growth of disruptive technologies like artificial intelligence (AI) and crypto. Many of the trends affecting fintechs are similar to those seen in other high-tech sectors: the rise of generative AI, a focus on ESG and cloud-based management along with the cybersecurity risks it brings. The broader sharing economy trend manifests in the banking and payments sector as an expansion of “bank as a service,” where banks back up online financial services providers, who manage the interface and user experience aspects.
For banks, this allows them to share this infrastructure among several fintechs, increasing revenue at little extra cost. In return, non-banks are able to “offer financial services to deepen relationships with consumers, starting with branded payment cards, but extending to buy now pay later (BNPL) and other types of unsecured lending.” This is leading to ever more segmented digital propositions where new entrants only worry about the cost of the over-the-top digital services, while specialist banks and a growing number of incumbent banks handle regulated activities.
Fragmentation and Legacy Systems
This value chain is further fragmented due to the difficulties of updating legacy core banking systems. In response, we’ve seen partnerships a layer deeper than that with traditional banks who own the banking licence, then a technology partner to deliver the “As A Service components on top of that, and then the non-bank entity that will be the face of the OTT services.” This granularisation is only expected to grow as the market matures. Alongside this, a channel shift is taking place as the number of entrants in the payment and financing sector grows.
Strategic Partnership Framework
Based on the provided material, the following table summarizes the roles and drivers in the current fintech ecosystem:
| Category | Details |
|---|---|
| Key Drivers | Regulatory alignment, funding costs, AI growth, and crypto development. |
| Bank Contribution | Regulatory entitlements, legitimacy, and payment infrastructure. |
| Fintech Focus | User experience, interface management, and branded payment services. |
| Partnership Levels | Referral links, white labelling, co-development, and acqui-hiring. |
Banks now face new strategic questions around how to optimize a bank’s products and services for a third-party environment it cannot fully control and the extent that this distribution dilutes or enhances a bank’s brand. This shift is beyond simply altering the mix of channels used, like the move to using payment infrastructure built into apps like Facebook or TikTok.
