Large firms in established industries are increasingly partnering with emerging companies that can deliver innovation and revenue growth. These smaller companies, often called xTechs — think fintechs in the financial services industry — benefit from access to capital, revenue, cash flow, and industry knowledge.
In the first of a series of briefings on growing with xTechs, researchers Alan Thorogood and Peter Reynolds with the MIT Center for Information Systems Research examine the risks and rewards of xTech partnerships.
The authors look specifically at financial services, where fintech partners have helped large banks implement features such as the ability to open an account within a day and approve home loan applications faster than their competitors.
Four types of xTech partnerships
According to the researchers, there are four common reasons fintech startups and financial services firms partner.
- Exploring technology. Here, large organizations look to fintech partners to test new customer-facing products or internal systems. For example, the fintech firm could work quickly to install a new digital platform to test support processes such as compliance, governance, security, and integration.
- Incubating business models. In the business model approach, partners build a model and customer value proposition and then offer a test product to customers. The owners of business operations curate the supporting processes. In these instances, financial services firms often identify a product that addresses an unmet need for a small target market segment and then test its use and performance. Through careful iteration, they may build the confidence to implement it on a larger scale.
- Scaling. This type of partnership involves moving large-scale workloads — hundreds of products, millions of customer accounts, or billions of transactions — from legacy platforms to new fintech platforms. This helps large firms break down silos among business units, which increases data monetization and data liquidity across the organization.
- Passive investments. In these cases, a financial services firm might directly invest in a startup through an incubator or investment branch. These arrangements work best when the large organization gives the fintech firm significant latitude to innovate.
Risks and rewards of xTech partnerships
There’s some risk to these types of partnerships, the researchers found. Leaders of multinational banks are often concerned with regulatory and compliance risks and brand risk, more so than many fintech firms. As a result, many large organizations opt to initially isolate fintech partners from core business systems to reduce risk — and to allow for easier separation if necessary.
Startups, meanwhile, need to demonstrate progress to investors. That means moving quickly, which often conflicts with large organizations’ iterative approach to implementation. They may also struggle to meet regulatory standards as well as the expectations of varied institutional stakeholders.
Such partnerships can also be rewarding, though. Fintech firms offer larger companies the flexibility to test new products with existing customers, or to develop new business lines, without disturbing core business systems. What’s more, fintech products bring projects to scale far faster than large organizations could achieve with their less-agile development approaches.
Building a future-ready organization through an xTech partnership is beneficial on its own, but it can also bring financial gains. MIT CISR research indicates that large organizations achieve average revenue growth of more than 17% compared with the industry average through improvements in customer experience and operational efficiency. In other words, finding the right xTech partner can help companies leapfrog competitors by quickly achieving a significant competitive advantage.