The concept of banks partnering with non-bank partners to create specific offerings has been a piece of the financial services landscape for many years. Somehow though, these partnerships have always fallen short of their early promise. Why then is it so difficult to make these partnerships work? What is it that causes a great business idea to perform sluggishly (or even grind to a halt) when it should be flying? I don’t think it’s overly simplistic to see the issue of conflicting interests as the primary driver behind these challenges. To find a way to align the interests of banks and non-banks is incredibly difficult. The complexity of the banking world coupled with the amount of oversight and regulatory pressure inherent in this industry is something that is very hard for non-banking entities to absorb. Beyond these issues, the high potential for a partnership to create internal competition and cannibalisation of the bank’s existing product range adds further tension. Creating an environment in which these partnerships can flourish is therefore reliant on a few critical factors:
A shared vision for the offering
This sounds obvious, but it is critical that you agree on a vision for the partnership and particularly for how the offering created may develop. While the initial product offering may well be something that all parties agree to, iterative development may result in conflicts and internal competition further down the line. Try to envisage how the offering could develop and agree parameters up-front wherever possible.
Absolute clarity and agreement on the non-negotiables
Some things should be simply non-negotiable in any partnership. In banking partnerships specifically, I have always found that regulatory compliance should be specifically raised and documented upfront as a non-negotiable. These critical ‘rules of the game’ should not only be met but should in fact be viewed as sacrosanct by all partners.
Honest engagement around customer management and ownership
The most common point of conflict that we see in banking partnerships goes to the ownership of the customer relationship, and how customer data is protected and managed. While the management and protection of the data is clearly driven by the various acts and standards at play both globally and in the local jurisdiction, customer “ownership” is a more challenging concept. If the parties cannot agree who the real customer relationship lies with at inception, the potential for future conflict in the partnership grows exponentially. This is something that should occupy a great deal of the upfront negotiating time (and space in the legal agreements) to ensure clarity.
A defined path to customer expansion and share-of-wallet
Banking partnerships seldom create a complete banking offering. They tend to focus on a couple of products / services at most. Over time, meeting the broader banking needs of the customer (i.e. beyond the partnerships product offering) may become a point of contention. Attempts to migrate the customer to different products outside of the partnership, attempts to grow share-of-wallet by selling additional products that the partnership may not currently offer – these all have the potential to create conflict and ultimately a critical failure in the partnership if not agreed, negotiated and documented at the inception of the partnership.
Clear definition of roles and responsibilities
Partnerships are usually formed with the specific intent of bringing together skills and capabilities to form a more compelling offering. It makes no sense to bring these skills together if the partners don’t clearly articulate and agree on roles and responsibilities in the partnership that leverage these capabilities. Being absolutely clear, particularly on key roles like sales, distribution, operations, risk, compliance management, marketing and brand management at the beginning of the relationship reduces the chance of conflict as the partnership develops.
Limiting the areas of potential competition
Exclusivity clauses and limitation of potential areas of competition are two sides of this coin. On the one hand, the non-banking partner may be inclined to request that the banking partner does not sponsor or partner with its direct competitors. The banking partner needs to weigh the opportunity cost of such a request against the conflict it could create to refuse such a request. It is certainly worth granting exclusivity in some circumstances, particularly where the partner in question is dominant in its industry. The other side of the coin is a limitation of potential areas of conflict. Envisaging how the partnership’s offering could compete with the banking partner’s own range of products is key. Ideally, you should agree on the range of products to be developed under the partnership, those products that are “off limits” for the partnership and those in which the partners are free to explore offerings with other players. In developing these partnerships over the past 10 years (we call it Alliance Banking), we have taken these lessons to heart. Being a smaller player has certainly allowed us to avoid some of the conflicts that could occur, but that is perhaps only part of the story. We believe most strongly in the concept of shared vision - that’s why it’s the first factor listed. We have taken the decision to be highly selective in our partnerships and to only engage in those opportunities where we by buy into the idea behind the business, rather than simply ‘licencing’ it. This has allowed our bank to be part of business that have innovated payments technologies, made very real contributions to financial inclusion and created some serious (positive) industry disruption.