Yet what benefits are there for startups in such arrangements? Simply put, the answer is scale, with banks able to provide the infrastructure, capital and access to markets even the most innovative fintech startups lack.
For Camilla Swart, ecosystem manager at Barclays’ Rise innovation hub in Cape Town, the reality for fintechs like the African proverb: “If you want to go fast, go on your own. If you want to go far, go together.”
“Sometimes the relationship can take a while with all the layers of approvals and processes but what the dynamic definitely brings is scale,” she said.
“For startups, partnerships with banks allow them to scale their technology and access the capital they need to grow by gaining access to more customers.”
George Wakaria, vice president of cash management at Citibank in Kenya, agrees.
“Many fintech models require high levels of ramp up on customers or transactions to make the return on investment work. With their regional and global footprint, banks offer fintechs a clear distribution network to get their solutions out to more clients in varied markets,” he said.
Zachariah George, co-founder and chief investment officer of Startupbootcamp Africa, said a major challenge for fintech startups is access to market, clients and distribution channels.
“Economies of scale make it very hard for young fintech companies to stress test their tech savvy solutions with large sample sizes,” he said. “So, partnering with banks through pilots and proof of concept experiments allows fintech companies to validate their product offerings quicker and through the ‘safe haven’ of it being done through a perceived ‘trustworthy’ banking partner.”
Trust is an important issue here, with Entersekt chief executive officer (CEO) Schalk Nolte saying startups can piggyback on the relationship banks already have with their customers.
“Dealing with payments or financial services by its nature requires trust, and this is not easily or cheaply obtained – trust is not built overnight. Banks have trust and a large customer base which can lead to quick market acquisition or attaining critical mass for the tintech,” he said.
This is a view shared by Swart, who says banks come with brand recognition that can be helpful for building credibility in the market.
“Banks offer support and relationship with the regulator and the bank has expertise in risk management, which is enormously helpful to the fintech. At Rise we even have a risk and compliance officer on hand to help strategise on regulatory frameworks for fintechs,” she said.
Wakaria also points to a bank’s regulatory and compliance experience as a major benefit to a startup partner.
“Fintech companies have quickly come to realise how heavily regulated the financial industry is and how costly compliance is. They know that compliance requires expertise and investment and this is something that the banks have experience in,” he said.
George agrees regulatory constraints are another driver to develop partnerships.
“Often fintech companies, particularly those that specialise in digital platforms, may not have the necessary licenses to offer financial services directly. Other fintechs may be too early in their development to request a license. In both cases, they partner with microfinance institutions, banks or others to provide these services,” he said.