Why bank-fintech partnerships go sour and how to prevent the hug of death
- Fintechs perform best when they can move fast and focus on growth, but when partnering up with big banks, some fintechs can experience the "hug of death".
- This hug keeps the fintech from focusing on its own priorities and instead diverts its attentions to what the banks needs and locks it in a cycle of meetings and bureaucracy. Fintechs that want to avoid getting over indexed need to focus on establishing clear boundaries from the start and keeping the scope of the partnership in check.
Coined by MIT Researcher Alan Thorogood, the phrase ‘hug of death’ refers to a situation where the mismatch between the bank’s and fintech’s priorities and their relative speeds results in the fintech’s resources being over indexed and a failure to achieve the fintech’s strategic goals.
Fintechs thrive when they move fast and through “consistent growth in customers, funds and transactions, which in turn facilitates capital raising and scaling of their products and businesses,” says Scott Simari, Principal of Sendero Consulting.
Banks however move slowly because they have to maintain compliance, manage risk and prevent product cannibalization, said Simari.
“It’s the endless committees, meetings, tollgates and reviews – often a lot of activity and strain on the fintech’s resources without meaningful productivity. From the fintech’s perspective, it’s an opportunity cost problem; the time and resources spent on supporting the financial institution could be better utilized to achieve their own strategic goals,” he said.
There is much to be said about the boons of bank-fintech partnerships and how they can push the financial industry towards innovation. There is a lot that can go wrong, too.
Much talk, no money
For banks, one of the worst things that can happen with partnerships is investing into a relationship with a fintech company that bears little fruit. For example, loan productivity and loan volume are primary priorities for banks to seek a partnership with fintechs, but only 28% of banks report seeing 5% or more improvement in these areas, according to research.
