The bank-fintech partnership isn’t always a match made in heaven.

The topic spurred the inclusion of a fintech-bank “couples counseling” session at the Association for Certified Anti-Money Laundering Specialists (ACAMS) Anti-Financial Crime Conference last week in Las Vegas.

While banks and fintechs have partnered for years to enable new functionalities and services for customers, with these collaborations viewed as the future of banking and financial services, banks are often viewed as “strange bedfellows with fintechs,” said Thomas Bell, a regulatory attorney at financial services fintech Square.

While banks appear to “have the necessary regulatory authority and/or connectivity to issue a particular product,” they may be viewed as being “in the digital dark ages and can’t attract and retain customers for lack of good technology to build attractive user interfaces,” Bell said.

Meanwhile, fintechs can be seen as having “all the digital chops in the world to build super attractive, fun products that draw in customers, but don’t have any capability or interest in compliance controls and don’t have any regulatory authority to go to market,” he added.

However, the reality is quite different, Bell said. Fintechs are “deeply invested” in compliance, and banks “definitely have significant digital and other technological prowess … and also have significant branding power that oftentimes fintechs don’t.”

3 pain points

Three pain points in the bank-fintech relationship emerged in the “couples counseling” session:

1. Risk appetites. Frederick Reynolds, chief compliance officer at San Francisco-based fintech Brex, said that when it comes to banks and fintechs, there may be “different risk appetites for partners, but even different risk appetites within partners.” Reynolds said he has a multi-angle perspective of this subject, noting that he formerly worked at $174.1 billion Barclays and $3.03 trillion Bank of America as well as for the U.S. Department of the Treasury. Difficulties can arise when a fintech works with several banks, perhaps all with different risk appetites, or even with varying risk appetites within the same organization, he said.
2. Market maturity. Fintechs often have new products and offerings, Reynolds said, and though those products may be good, the companies “lack the historical basis to be able to demonstrate their system[s].” When dealing with banks, that can be “a source of friction at times,” he added.
3. Timeliness. Melissa Raman, senior vice president of the correspondent banking and payments vertical at $1.95 trillion Wells Fargo, noted that fintechs tend to be agile by design and move quickly, which may not be the case for a bank. “Banks tend to move at a little bit of a different speed than fintechs … to say the least,” Raman said. “That is one of the difficult things [for banks in] engaging in these partnerships is making sure that you’re moving at a fast enough pace for your fintech partner. And that can be very difficult at a bank … when you have a lot of levels to get approval from.”

Solutions

Understanding risk appetite before moving into a partnership is essential, Raman said. “It’s making sure, really, that you have that alignment with your partner ― whether it be a bank or fintech ― in terms of risk appetite. That’s just absolutely critical,” she said. “Because if you’re vastly different in your risk appetites, problems are going to show up at some point.”

Reynolds addressed the market maturity issue for fintechs, speaking from his experience working at banks. “I think probably earlier engagement, and probably more clarity within my organization, would have made a difference to some of those relationships,” he said.

Another way to mitigate challenges when fintechs and banks work together is to make sure stakeholders from within both organizations is on the same page.

“Getting all of the people at the table at that help center is really important,” Raman said. “You want to get legal and compliance at the table, your risk partners, along with the sales folks, so that everyone is on the same page about what the expectation should be from the beginning.”