Fintech start-ups must increasingly rely on strategic partnerships to fuel their growth ambitions. A round-table event hosted by IHS Markit and ourselves has highlighted the power of collaboration.
Start-ups in online lending, digital currency, mobile payments, and niche areas such as robo-advising and regulatory compliance, continue to shake up the financial services industry. But they are not doing it alone.
Partnerships and collaboration between start-ups and well-established companies, including global banks and financial-market vendors such as our company, are helping to drive fintech’s rapid growth.
This was brought to life at the inaugural Partner Impact Roundtable in New York, in association with IHS Markit, where our partners and other industry experts met to share ideas and insights. Partners in attendance included New Constructs, Kensho, Airex Market, AlphaSense, CloudMargin, ForwardLane.
A common theme emerged: partnerships are increasingly becoming an essential element of any fintech start-up’s strategy.
Gaining a foothold
The logic is simple. Start-ups may possess creative and innovative technology, but they require support with technical and business expertise, data, and go-to-market access necessary to scale their operations.
Despite a rise in fintech investment to US$50 billion by 2015, start-ups face challenging hurdles when it comes to developing their products and growth strategy.
They need platforms and ecosystems in which to thrive, which makes partnering almost compulsory for fintechs hoping to scale their businesses and gain a foothold in the capital markets sector.
On the flip side, partnering with fintechs and incubators gives established companies access to technology and innovation that would be difficult, if not impossible, to develop on their own, and provides access to new tools that can benefit customers.
When partnering with fintechs, a company such as our own can serve as an accelerator, providing access to a wide array of data content, as well as sales teams, solutions expertise, and even seed funding. That’s why we have opened up our Eikon platform to fintech start-ups in order to remove barriers to efficient, collaborative workflows in the financial industry.
Affordability issue
Banks increasingly have their skin in the game, according to Jean Donnelly, executive director of Fintech Sandbox, a Boston-based firm that offers financial data feeds and APIs for start-up development purposes. “Partnerships and collaborations are extremely important to the fintech industry,” says Donnelly.
“Large institutions are looking to develop more customer-focused products. We’ve seen a hyper-personalization in the marketplace and the demand by customers to move faster. It’s gotten harder and harder due to the regulatory environment, and created a tighter bottom line for some incumbents.”
In the past, says Donnelly, financial institutions were leaders in technology, but they’re now looking outside to partner or purchase because they can’t afford to develop on their own any more, and they can’t move fast enough given consolidation in the industry. Fintechs realize there’s an opportunity.
They can look at the full value chain of different institutions, from front office to back office, and find the need for compelling applications, while banks can take emerging technologies and add them to their models.
In the end, both sides benefit from the collaboration. It’s a win-win scenario.
Validation challenge
Illuminate Financial Management, a capital markets technology-focused venture capital firm, takes another approach to partnership and collaboration. Illuminate Financial has several strategic industry partners including IHS Markit and has assessed 900 fintech start-ups over the past few years.
Illuminate looks to bridge the gap between financial institutions and the start-ups developing new technologies, creating a three-way partnership.
Illuminate’s investment executive Alexander Ross says technology can help solve the four main problems that financial institutions are currently facing: cost, capital, control and compliance. There’s no lack of innovation — the challenge is validation.
“We work to identify relevant businesses with which incumbent financial institutions (several of which are our strategic partners) should engage with to solve these problems,” says Ross.
“We drive engagement between start-ups and larger companies and deploy capital to drive their growth so there’s less risk for institutions seeking to adopt the new technologies.”
Illuminate usually steps in once a start-up has got past its initial hurdles — building the initial product, finding a design partner and building a tech team.
Regtech opportunity
Partners can make a real difference when it comes to helping start-ups navigate the complex world of banks, which have layers of bureaucracy.
“Partners have experience, and they know how to position themselves with a bank,” says Donnelly. “Fintechs are small, they may have only four or five people on the staff. If they end up spending time pitching to a dozen different departments at a large institution, only to have it go into the ether, they’ve wasted valuable time and energy.
“An established partner familiar with the workings of a bank can help avoid these pitfalls.”
One of the biggest concerns for banks today is compliance — and fintech is stepping up to meet the challenge. So-called regtech start-ups use algorithms, predictive analytics, and other technologies to help firms manage initiatives such as risk management, Know Your Customer, and countering fraudulent activity.
There’s a real opportunity for new companies to carve out a niche in the regtech space and exciting technologies continue to emerge there.
Artificial intelligence
“Regulation is the gift that keeps on giving in terms of opportunities to solve very specific problems for institutions,” says Ross. “There’s no better driver of adoption than a regulatory gun to the head.
“Compliance is massively important. Approximately 10 to 15 percent of employees at large banks are focused on it, so there’s clearly an opportunity. We are seeing a new wave of low cost, cloud based regtech solutions focused on specific regulations that can reduce the compliance burden on business managers.”
Fintech firms are also embracing artificial intelligence and machine learning.
As the fintech playing field evolves, two things are certain: start-ups will continue to leverage today’s cutting-edge technologies to solve a myriad of financial services problems. And they will seek partnerships and collaboration to ensure the ongoing success of their businesses, and those of their clients.
Working together has been hugely successful for everybody, even companies that are rivals. It’s fascinating to see how fintechs and the partnership strategy are changing how we operate.
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