Build, buy or partner: fintech viewed through the digital lending lens
For those who seek to expand into new lines of business, improve operational capabilities or tap new markets, the question so often amounts to this: Should you build, buy or partner your way to success?
While it’s becoming a more-than-common question, the answer often carries with it this salient truth: Technology has always been disruptive and established companies have always struggled with the best way to meet changing trends. No matter the chosen path, declining to choose no longer represents a safe or sound option.
Until recently, credit unions and community banks have avoided major threats from digitalization, automation and big data; brick-and-mortar branches sufficed to service their traditional customer base. But those days are over. Fintechs now compete for the same individuals and small businesses that historically turned to credit unions and community banks. These financial institutions must now adapt.
The ease of digital banking appeals to people across generations and demographics—which means customers now expect such services from their financial institutions. What happens if institutions fall short? Consider that 51 percent of millennials and 40 percent of GenXers would switch banks just for a better mobile app, according to BAI Banking Outlook findings.
Fortunately, strong options abound. Fintechs large and small offer a wide variety of financial products and services that utilize the latest technology, which can then be white labeled or simply acquired. What’s more, an expanding talent pool of technologists gives institutions access to the necessary skill sets should they choose to build internally. To answer the build-buy-partner question, financial institutions must consider the core competencies and competitive advantages that distinguish them, as well as their culture, structure and access to capital. Cookie-cutter approaches won’t work. But for banks, partnering with fintechs can often prove the most beneficial route and provide needed optionality for the long term.
The “build” option
When choosing to build, an institution must recruit product managers, engineers and other highly-skilled, highly-trained, highly-educated employees who demand significant compensation. That goes hand in hand with an upfront investment in infrastructure to support software development, testing, security and maintenance. Speed to market typically slows down if an institution chooses to build—thereby raising the risk that the product or service will be out-positioned by time of launch. And while some of the largest financial institutions have developed widely-adopted new digital products and applications internally, they are the exception, not the norm—and often put surplus capital to work to do it.
The “buy” option
Buy presents its own challenges. Few credit unions and community banks have the financial clout to acquire a fintech and those that do will face numerous hurdles. The include integrating the acquisition into their existing operations, technology stack and company culture. While there exist many examples of successful fintech acquisitions by financial institutions, progress will often break down unless the acquirer prepares for a lengthy, resource-consuming process. Given such obstacles, this may not represent the most viable option.
The “partner” option
This often proves the most cost-effective and efficient. A number of solutions allow community financial institutions to digitize and automate products and services—which enable them to capture the benefits of providing the kind of digital user experience consumers now expect. Partnering with a fintech also provides institutions with an option to test before investing in a build or buy strategy at a later time. For institutions that seek a stop-gap solution, partnering can meet this need as it buys valuable time to develop a longer-term alternative.
What may sound hyperbolic is in fact historic: The technological challenges and imperatives that credit unions and community banks face today threaten their very existence. Those that fail to adapt quickly face the risk of becoming irrelevant. Fortunately, the build-buy-partner triad supports myriad solutions that allow institutions to provide a smart digital experience to their customers without relinquishing their core competencies and competitive advantages. Any path is possible.