OBSERVATIONS FROM THE FINTECH SNARK TANK
Fintech partnerships are a hot topic in banking, and JPMorgan Chase’s (JPMC) new head of fintech and innovation, Jeremy Balkin, fired a salvo at other banks when he said at a recent conference:
“Chase is the bank of choice for fintech partnerships. JPMorgan is to payments what Amazon Web Services is to the cloud and the internet.”
Referencing the bank’s four million merchant customers, Balkin told the conference audience, “think how valuable that client pool—that data set—is for a fintech with a disruptive point-of-sale solution.”
It’s a compelling proposition for potential fintech partners.
Commenting on the rise of fintechs like PayPal and Square, JPMorgan Chase CEO Jamie Dimon recently told analysts:
“We should be scared s—-less about that.”
Other banks should be scared s—-less about what Chase is doing.
According to Balkin:
“Our roadmap is absolutely insane with what we have on our agenda for this year. The bank is willing to experiment, and has a culture that is strong enough to say ‘let’s do something different.’”
The Bank-Fintech Partnership State of the Union
According to a study from Cornerstone Advisors, 45% of US-based banks and credit unions have partnered with fintechs in the past three years. Looking ahead, two-thirds of all financial institutions consider fintech partnerships important to their strategies.
To date, the impact of bank-fintech partnerships have been tepid. Less than one in five banks have seen significant improvements—defined as a 5% or better gain—in nine different performance metrics.
The lack of impact shouldn’t come as a surprise, for two reasons.
First, on average, mid-size institutions (those with $500 million to $50 billion in assets—in contrast to JPMorgan Chase’s $3.386 trillion) have just two full-time employees dedicated to fintech partnerships. One in five banks have none, and just 6% have five or more employees working on fintech partnerships.
Question: How many fintech partnerships can two people identify, vet, negotiate, deploy, scale, and monitor? Answer: Not very many.
Second, the focus of many bank-fintech partnerships has been on digital account opening.
There’s no question that having a strong digital account opening and onboarding capability is critical. But it’s table stakes these days, and it’s not a candidate for a bank-fintech “partnership”—it’s a bank-vendor relationship.
The Chase Fintech Partnership Threat
Chase is hardly the first bank to talk about fintech partnerships. What’s different, however, is that:
- Many of the large banks who have gotten into fintech have done so from an investment perspective—not from an operational integration perspective.
- JPMC is talking about working with merchants to integrate and deploy fintech innovations. Fintech innovation in the merchant space to date has focused on taking banks out of the equation, not better integrating them. In addition, most partnerships have focused on consumers, not merchants.
- JPMC seems sincere in wanting to partner with fintech companies. That might seem like an odd statement, but I’ve talked with fintech founders who have had partnership conversations with big banks, only to feel like the banks were pumping them for information with the intention of stealing their ideas.
So far, fintechs have found a receptive audience and—for the most part—a bureaucracy-free environment among mid-size banks, compared to the megabanks.
JPMC’s signal to the market that it’s serious about fintech partnerships—not just from an investment perspective, but from an operational perspective—may reduce this bureaucracy and make it harder for smaller banks to compete for partnerships.
Smaller Institutions Are Partnering to Partner
Banks aren’t taking this lying down. Initiatives in the mid-size bank space include:
- ICBA ThinkTech Accelerator. The Independent Community Bankers of America’s ThinkTech Accelerator provides fintech entrepreneurs mentorship from fintech experts as well as access to the association’s executive network and community bank members.
- JAM Special Opportunity Ventures. Along with fintech investor FINTOP Capital, this affiliate of Jacobs Asset Management has created a $150 million investment fund to help accelerate technology adoption at 66 banks including Umpqua Bank, Eastern Bank, and New York Community Bancorp.
- Alloy Labs. Founded in 2018 by 12 community and mid-sized banks, Alloy Labs Alliance has grown to more than 50 institutions collaborating on innovation and new technology initiatives. To date, the consortium has established 15 strategic partnerships with fintech companies and made six strategic investments.
Fintech Infrastructure: The Missing Piece of the Puzzle
How did Amazon Web Services become the “AWS of the cloud and internet”? It developed a technology platform that enabled entities to plug and play.
It’s not clear to me that JPMorgan Chase has that technology platform in place, but perfectly clear to me that most banks don’t.
Mid-size institutions lack scope and scale, and typically have to integrate their fintech partnership efforts with their core systems and digital platforms. With roughly 60% of all financial institutions yet to deploy APIs or cloud computing, most banks need help in building this new platform.
A growing list of tech providers is emerging to help banks create a platform for fintech integration including: Agora, Bond, Constellation, Item, Moov, Nymbus, Sherpa Technologies, Railsbank, Solarisbank, Synctera, Technisys, and Treasury Prime.
Fintech Partnering is a New Strategic Competency
Competition for fintech alliances is hotter than it’s ever been. The days are over when banks could:
- Have their pick of the fintech litter to choose from will be threatened by Chase’s initiative.
- Create what Alloy Labs’ Jason Henrichs calls a “fintech petting zoo”—non-strategic, non-operational alliances to test and experiment with new technologies and partners.
- Simply decide between build versus buy. The new reality: Banks must build and buy and partner and integrate.
Two people working on fintech partnerships in a bank isn’t enough. Banks need to develop a competency—and a technical platform—for fintech partnerships. If building this competency isn’t part of your bank’s digital transformation efforts, you need to re-evaluate that strategy.
In bank and credit union board meetings, directors are getting antsy that their institutions are losing ground in the race to partner with fintechs. JPMorgan Chase’s foray into fintech partnerships is going to up that agitation even further.