How traditional Financial Institutions work with Fintech? (Forms of relationship)

We are hearing more and more about Financial Institutions (FIs) working with Fintech together to bring new value to customers or competitive advantage of their own. In terms of ‘working together’, how many formats are there and which one is more effective than the other?

In this article, we will introduce a few common forms of relationship and discuss which one is more relevant than the other under different circumstances.

There are, in general, 3 forms of relationship:

  1. Incubator/ Accelerator
  2. Equity investment
  3. Partnership

Let’s discuss them one by one:

1.Incubator/ Accelerator

Many FIs have set up their own incubator or accelerator program to nurture young startups. The FIs would select early stage companies with solutions that are relevant to its industry into the program, sponsor an initial or seed funding, guide the startups to crystallize the idea and plan, provide mentoring, and source network to assist their development. The funding provided might just be a grant to the startup or it could require a small equity in return. Valuation is typically not negotiable.

Usual program period ranges from 3 months to 1 year. During that, startups can tap on the FIs’ resources (network, technology, mentors, funding) to grow. The solution developed may or may not be successful and the risk is relatively high.

This form of relationship allows FIs to spot potential solutions and applications at early stage and bring that in at low cost. However, the rate of success depends as the startups and the solution are both very young.

Examples of FI incubators or accelerators: Barclays Accelerator, Wells Fargo Startup Accelerator, Deutsche Bank Innovation Labs

2.Equity investment

This refers to the FIs buying a stake of the shareholding of the Fintech. It could be minority or majority shareholding, depends on the solution nature and how the FI strategy is. The bonding is the strongest among the forms of relationship and valuation is one of the key discussions. Usually the Fintech is more mature with concrete solution and business plan. The investing FIs see the strategic value and synergy that a Fintech can bring, or it sees the threat if the Fintech ends up joining its competitors’ franchise.

Below chart retrieved from CB Insights shows the investment in Fintechs by Top 13 Largest European (Chart 1.) and US banks (Chart 2.), from 2012 to YTD 2017. Most of the investment plug in to the particular FI’s business franchise or area to develop.

Chart 1.


Chart 2.


However, some banks’ policy may not prefer direct investment into Fintech, due to capital requirement under Basel III.


Partnership is an arrangement when a FI and Fintech work on a project or particular area together, e.g. acquisition plan, new product development, data analytics, regulatory compliance, cost control etc. There is a contractual relationship specifying the scope of partnership, but the relationship is considered less binding than an equity investment.

Sometimes partnership is for experiment with uncertainty, when the FI is not sure whether this solution is beneficial to the organisation and would like to pilot before full implementation, or any investment decision is to be made. While on the other hand, the Fintech has the solution but no customer base to test out, or lack the infrastructure to operate. So partnership can create a win-win situation here.

Fintech can help FIs to acquire customers via new channel, low cost to service customers, streamline or automate its regulatory compliance procedures and thus lower the cost. Fintech provides a readily available solution and the FIs do not have to develop themselves, which might take years. From the Fintech perspective, it benefits by acquiring the FI’s customer base immediately, collecting data, or a licensing fee paid by the FIs for using its services.

Example: TD Bank Group partners with Flybits to provide personalized mobile banking experiences, including financial advice; J.P. Morgan partners with OnDeck and LiftFund to provide small business loans; AXA partners with Trov to launch an on-demand, mobile-first service aimed at millennials.

Partnership works particularly well in the Community bank- Fintech partnership example. Community banks refer to banks that have asset size of US$100 million to US$5 billion. Common characteristics of community banks, compared to large banks, are smaller customer base, fewer branches, higher cost of fund and less capital. Besides that, community banks are facing lower profitability due to low interest rate and higher regulatory compliance cost. The survival struggle of community banks have pushed them to explore transformation, and Fintech comes in time for collaboration.


The different forms of relationship depends on the stage of Fintech, strategic direction of the FI, and the synergy of the two. We discussed how different relationships might fit better in certain situations. However, this could also be viewed as a journey – where the FI nurtures a relevant Fintech using its incubator, test out partnership to launch product and with successful experiment or implementation, the FI can seize opportunity to acquire / obtain a stake of the Fintech at lower valuation.



CB Insights (2017). In Visualizing Where Major US Banks Have Investment in Fintech [database online]. Available from

CB Insights (2017). In Where Top European Banks Are Investment in Fintech In One Graphic [database online]. Available from




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