Rising costs and growing fee compression have made it difficult for banks to keep up with today’s pace of change. The traditional ways banks have adapted their operating models to meet challenges such as regulatory requirements, increasing competition, and shifting client demands are no longer enough.

In order to remain competitive, banks will need to identify new ways to create differentiated value for their clients, which includes offering innovative technologies and solutions to their business challenges.  

Strategic partnerships between banks are emerging as a new path forward. They offer an effective way to meet client needs and innovate quickly without having to build it all in house. This way of working together puts both organizations in a position of strength for continued growth and development.

Hear why Cate Dawson, our Head of Product for Financial Institutions, believes partnerships are a growing trend and what to keep in mind if interested in pursuing this model.

Q: Why are bank-to-bank partnerships a growing opportunity?

Cate: Banks typically consider three options when evolving their operating model: build, buy, or outsource. However, each come with their own set of challenges and risks - especially in today’s fast paced environment.

Build: Due to the extensive time, costs, and expertise necessary, building can be difficult option, especially for small to mid-sized banks.

Buy: Presuming there are viable options available in the market, banks may opt to buy core operating technology from a tech vendor. However, that can be restrictive, expensive, and highly challenging to integrate and maintain. It can also limit your future ability to advance and customize your product capabilities or create differentiation.

Outsource: While outsourcing can be a quick solution to mitigate costs, it can also lead to disintermediation and, over time, the loss of control and internal product expertise which can impact the overall end product quality. These arrangements are also often limited to specific functions and services, without the ability to address horizontal or complex business challenges.

Partnerships offer an emerging fourth option.

Q: What’s the difference between outsourcing and partnering?

Cate: The difference between outsourcing and partnering ultimately comes down to your business objectives and what each organization wants to achieve.

Outsourcing is when an organization hires a specific provider to produce goods or perform services on their behalf. Partnerships, however, are more bi-directional and collaborative in nature. Most importantly, they are mutually beneficial, bringing value to both parties.

These two approaches often get conflated, especially as many Fintechs and BPO providers want to be seen as a “partner” to their users. However, these “partnerships” can tend to lack the reciprocity and mutual benefit that a true strategic partnership can provide and end up resembling a traditional third-party vendor relationship.

Q: What does a bank-to-bank partnership look like?

This particular type of partnership allows banks to share expertise and innovative technology while also sharing cost. Two institutions with complementary business models or client books come together to strengthen their competitiveness and create a formidable business proposition.

We are champions of this model because we have found value in these relationships ourselves. In one case, another bank leverages our custody platform and technology, which affords them scale, expertise and coverage. We benefit from the shared investment that supports the development of differentiated products and features on the platform. Through partnership, the bank can retain their home market presence and focus on providing the expertise their clients expect.

Q: If an institution decides to pursue a partnership, what should they consider when choosing who to partner with?

Cate: Choosing the right partner is critical for success given the close and collaborative nature of the relationship. Identifying the right partner can be difficult but at its foundation both parties agree upon some key criteria:

• Prioritizing mutual success for both banks: A successful partnership cannot have competing priorities and both banks must be looking to win together.
• Fostering a relationship of trust: This requires clear communication and transparency. This becomes particularly important when discussing business jurisdiction and rules of engagement when competing against each other.
• Agreeing upon culture and values: Do both organizations share the same values? For example, a bank that values high touch personalized service for all of their clients should not partner with a bank who prefers call centers or chat bots.

A strong partnership is an extension of your own business and both organizations should be invested in a long term relationship to create impact and add value. By sharing the risk and rewards of the business together, partnerships can foster stronger relationships between one another and with their clients.