The thrills and spills of FinTech and custodian collaboration

With new partnerships between FinTechs and custodians popping up every week, Virginie O’Shea, founder, Firebrand Research, gives her take on why some of these collaborations go well, and why some don’t, and the range of outcomes that can occur.

I have often described the relationship between vendors and financial institutions like a marriage and, like a longstanding partnership of both types, things can go awry if both partners aren’t in it for the same reasons. Commitment, trust, common goals—all of these things are vital to the long-term success of the endeavour.

At the end of the month, I’ll be chairing a panel at The Network Forum on the topic of collaboration between FinTech firms and custodians. Ahead of the event – and following on from Global Custodian’s own panel discussion on Projects and Partnerships – I have been thinking about all the interesting partnerships I have seen over the years and the impact of vendor acquisitions by custodians, as well as spin offs in the other direction. I thought I’d share a handful of my observations:

When custodians struggle to overcome the vendor risk barriers: Custodians typically aren’t permitted to be the most adventurous of firms. When I train new recruits on the players in the industry, the figure I use for a custodian is Groundskeeper Willie from The Simpsons. He’s there to make sure everything is functioning well and the last thing he wants is any disruption to happen (especially not from Bart Simpson, but I digress). Custodians have to remain stable, resilient service providers to their clients, they can’t risk service interruptions caused by trialling a new technology or working with a vendor that might radically change course in a short period of time. This often means that they have to work with the household vendors that their vendor risk management and procurement teams are most comfortable with. The procurement cycle is also long, drawn out and painful for any small FinTech that needs to get revenue in the door as fast as possible. Partnerships do happen, but the “start-ups” I see in this realm tend to have been around a decade or more—not exactly your common or garden variety FinTech start-up.

When FinTechs get absorbed without a trace: A way around the procurement dance is to wholesale acquire the vendor along with its technology assets. Unfortunately for the FinTech, this often means a significant slow-down in product development and sales as the larger firm tries to get to grips with what it has bought. The culture clash between the two firms can also often be dramatic. It isn’t unusual for the vendor to disappear without a trace as its assets become subsumed into the larger organisation and its ethos and identify fade away as its key people leave. This isn’t always bad for the custodian—the acquisition will likely inject some great new technology into its stack—but that may be to the detriment of the vendor’s other existing clients and prospects.

It also leads to another of my observations…

The classic FinTech vs key client power struggle: If a large custodian signs on to work with a small, relatively early stage FinTech, it tends to have a lot of clout with that vendor. Large clients tend to get priority in product development requests and can end up dictating a vendor’s entire product roadmap, if allowed to get away with it. It’s hard to say no if the client is contributing the lion’s share of your revenue, after all. This can lead to a lot of tension between the vendor and its other clients. Managing this power dynamic is a real skill, but it’s important if the FinTech is to grow to support other larger clients in future.

When custodians can’t get out of their own way: Another classic challenge when it comes to partnerships with FinTechs is navigating internal politics on the custodian side. Trying to rollout a solution is always challenging, but working with a vendor in a high-profile public relationship is a political minefield. Maybe other interested parties have a different view on the direction of the partnership, maybe your key sponsor moves onto another pet project mid-way through, maybe the project fosters resentment within the IT department… You get the idea. This stuff isn’t easy.

When things go right: Though there are a lot of difficult things to navigate and people to keep onside, FinTech and custodian collaboration sometimes works very well (see, I’m not always a cynic). The success factors depend on a lot of hard work and close collaboration between the partners and an alignment that goes way beyond technology into culture and common goals. Moreover, bringing a FinTech in-house doesn’t always have to spell disaster—a great option for the custodian if things are proving culturally and practically challenging can be to spin out the venture into its own company again. You can always put a positive spin on the move—just pre-warn your comms and marketing teams…