Lessons learned for the fintech considering a partnership-based business model
When fintech debuted on the scene in the aftermath of the financial crisis, the aim was clear — disrupt and disintermediate the banks.
Today, the tenor is different. Visit any fintech conference from Money 2020 to LendIt and ‘partnership’ is the word de jure, as banks and fintechs race to find ways to collaborate. Over the years, fintech as varied as Avant, Upstart, Affirm, and OnDeck have come to increasingly see themselves as partners to banks rather than consumer-focused companies.
I witnessed this first hand as I helped to see ZestFinance (now ZestAI) through its pivot to providing AI/machine learning underwriting software to lenders worldwide.
Less discussed in this bank-fintech partnership race are its limits.
On its surface, the partnership model between banks and fintechs makes sense — fintechs focus on selling technology and its stable cash flows, while banks bring their considerable balance sheet and existing scale.
But lurking below there are considerable limits.
For banks, inertia, getting diverse stakeholders on board for a consensus buy, insufficient trust in the provider, legacy IT and siloed data, and deciding to build vs buy are just a short list of common reasons a deal gets derailed.
For fintechs this means: long sales cycles (potentially spanning years), high acquisition costs, low conversion rates, and the possibility of high levels of configuration and customization required in the product. This already assumes you’ve achieved strong product-market fit and initial credibility in your offering to facilitate early-sales success — tall orders in their own right!
What’s the fintech innovator to do?
In the span of two years at Zest, we partnered with a number of notable lenders to introduce AI-based underwriting, including Freddie Mac, Discover, and Vystar CU.
In reflecting on these successes, I identified 3 lessons I’d like to share for the fintech innovator looking to develop successful partnerships:
1. Use regulation and risk management as a competitive advantage.
Chances are, you’re doing something new and innovative. Your banking partners, meanwhile, are risk averse. To get the sale, you need to fully de-risk your offering. This means: compliance and risk management should be core product benefits, and you’ll need a compelling marketing message highlighting regulatory confidence in your offering.
To get there consider hiring former regulatory staff to help design and sell your service. My perspective having been a CFPB alumnus was invaluable at Zest, for example. Further, an active presence in DC with policymakers is table stakes (a la OCC, Federal Reserve, FDIC, NCUA, CFPB, FHFA, Capitol Hill, Treasury, etc.). Come to these conversations from a posture of understanding; these regulators want to learn from you in the form of demos, educational sessions, case studies, and even free trials of your product.
2. Partnership and B2B business models don’t naturally scale. Seek new ways to gain leverage.
The high-level of personal selling and product customization often required in complex B2B software sales and partnerships means it may not scale like traditional consumer tech businesses.
Instead, you need to rewrite the book and find new avenues to gain operating and business leverage. Consider: sales and technology partners that can market and speak on your behalf. At Zest, other large B2B tech providers like Microsoft and providers of loan management software like MeridianLink were both key sales and technology partners; their salesforce marketed our offerings and our combined technology meant easier implementation for customers.
Equally important: building a strong brand. Banks talk to one another — how do you get them to talk about you? At Zest, we invested a lot in shareable tools, guides, planners, and campaigns to drive conversations that involved us. For example, we developed a Value & AI Planning tool to help any banker put together a compelling business case to adopt machine learning.
Every step of the way, always ask how to add more value for each additional client that joins your platform.
3. Early adopters aren’t banks — they are innovative individuals within banks.
To gain traction in new segments, geographies, and for your product generally, you’ll need to focus on the mythical “early adopter.” But just who are they?
At Zest, we learned to avoid the pitfall of thinking that a specific bank or group of banks might qualify as early adopters. Early adopters are actually innovative executives and individuals that are working hard within their respective banking institution to make change happen.
New technologies and partnerships hold promise to further their own career ambitions while helping their institutions to win and beat the competition. Marketing and sales efforts should focus on identifying these individuals, connecting with them, and helping them build the case internally for your product and partnership.
“Every bank wants to be the 3.5th adopter — no one wants to be first; no one wants to second... but, no one wants to be last or left behind.” -SVP of Partnerships of a large b2b fintech
What’s Next
In the span of two years, I feel very proud of the market traction we gained in Zest’s pivot to an AI/machine learning software and credit scoring company.
Leaving Zest, I’m excited to push forward on what drew me there in the first place — expanding access to affordable credit to more people.
It is my firm belief that more inclusive, predictive underwriting and designing better, more suitable products holds great promise in furthering socio-economic mobility and improving financial outcomes for more people.