It's now widely accepted that collaboration between Financial Institutions (FIs) and FinTechs is mutually beneficial, given their complementary strengths. The Financial Institution has access to capital, regulatory expertise, a customer base, data and trust that the FinTech needs and the FinTech brings innovation, agility and efficiencies. According to a recent EFMA report, more than 8 in 10 FIs plan to increase collaboration with FinTechs in the next 3 to 5 years.
However, many in the sector recognise that on-boarding processes for FinTechs still do not work as well as they need to and this is one factor holding back collaboration. This is supported by the results of a survey that we carried out on FinTech partnerships earlier this year. 90% of those surveyed identified current procurement procedures as difficult (50%) or satisfactory (40%). Only 10% thought that existing procurement and contracting procedures were working well.
In recent months, we have seen some positive developments in this area. In particular, BSI, the UK's national standards body, is currently working on a Publicly Available Specification 201 (PAS) "Supporting fintechs in engaging with financial institutions — Guide", which is due for publication in the Autumn.
Having reviewed the draft — which was recently released for public consultation (now closed) — it is a useful summary of an FI's expectations and covers a range of areas including due diligence, how FinTechs should build and present their propositions, technology, on-boarding, and meeting business and regulatory demands. Once published, the PAS will be a useful guide for FinTechs preparing to engage with FIs.
However there's also work that FIs can do to encourage smoother engagement. Many FIs have recognised this and are actively addressing procurement and contractual challenges to make on-boarding FinTechs easier. Actions that can assist include the following:
- Being explicit about the FI's aims, objectives and key drivers when it comes to partnering with FinTechs.
- Clearly communicating the FI's requirements/criteria for a FinTech partner and ensuring expectations are aligned at the outset.
- Providing upfront an outline of the procurement timetable and details of the relevant stakeholders that the FinTech will need to engage with. Many FinTechs complain about the "procurement valley of death" and it's true that the engagement cycle can be longer than a FinTech may anticipate, so it's best that they are forewarned that they may need to be prepared to build their case over time. FIs also need to explore ways to speed up and streamline the on-boarding process for FinTechs.
- Providing an appropriate due diligence checklist upfront so that FinTechs are clear as to what's required. FIs should consider whether their standard due diligence requirements for larger tech providers need to be tailored to reflect the size and nature of the FinTechs they want to work with.
- Ensuring that the contractual documentation (eg, NDA, proof of concept terms, pilot terms, escrow terms and/or other required contractual terms, etc.) put forward to the FinTech are fit for purpose. 75% of those we surveyed said that they typically contracted on the FI's terms. Of those, 90% of our survey respondents said that terms required change, ranging from "some change" to "a lot of customisation". FIs should consider coming up with a leaner set of contracting documents specifically tailored for FinTech collaborations. What's suitable for contracting with a large technology provider may not be appropriate when dealing with a start-up. Indeed, our survey identified concerns that the terms typically put forward do not reflect the nature and scale of the partnering organization, or the services to be provided by the FinTech. Survey respondents suggested that on-boarding would be improved if FIs presented a more appropriate contract as the starting point and contract terms that reflected a better balance of risk.
- In addition, given that a start-up may not have much legal support, FIs should consider including drafting notes in their standard partnering agreements explaining the FI's rationale for certain provisions. For example, our survey identified that data privacy, liability, regulatory compliance, termination and IP tend to be the most negotiated issues, so providing commentary on these clauses could be a good starting point.
Many of these principles are equally relevant to companies in other sectors that are looking to work with smaller innovative start-ups, including the legal sector. With an increasing focus on innovation, large enterprises have to work out how they can make the on-boarding process easier. Those companies that can move quickly to bring innovators on board will have a competitive edge on their rivals.