The future of partnership: why ecosystems matter more than scale

Ecosystems not empires are reshaping how banks and fintechs grow and innovate.

In a world where every company once raced to be the biggest, the winners of tomorrow could well be those that are the most connected. The landscape is shifting from scale advantage to ecosystem advantage.

Is bigger necessarily better?

Sure, bigger businesses can achieve economies of scale, diversification and lower unit costs.

They have greater capital and funding advantages, namely access to cheaper credit and thus lower funding costs. They can also spread their risk better, making them more stable. All this may contribute to them being more profitable. In theory.

But when it comes to financial services, are bigger banks necessarily better? With a more diversified product base, they may be better at absorbing losses. But does size translate into success when it comes to innovation and developing new sources of revenue?

The limitations of scale today

For the longest time, the way banks do business in developed markets has scarcely changed. That’s despite technological and societal changes. The same few firms dominate. New entry is modest. Innovation is incremental. Products and services are similar to each other and to what they have always been.

Too many banks and payment providers were chasing too few of the same customers with the same products. They saw digital as a new way to automate old processes to cut costs. Or as a new channel to distribute old products.

But the world has moved on. It’s now mobile-first, near-instant and on-demand. Yet checking creditworthiness and affordability, onboarding customers and making cross-border payments seem to be stuck in a bygone era.

Bigger didn’t mean better. In fact, the bigger the bank, the more scale can be a barrier to growth. They have to overcome legacy technology, internal rigidity, fear of cannibalizing existing business, diminishing returns and slower innovation cycles.

What is the fintech ecosystem?

Ecosystems were seldom discussed outside biology textbooks. They denoted a community of animals, plants, micro-organisms and non-living things and their shared environment. For example, the tree as an ecosystem, supporting different communities of organisms in the branches and leaves, trunk, root zone and tree base.

A financial services ecosystem refers to the network that collaborates to provide and improve financial services. This includes banks, fintech companies, third-party vendors, regulators, investors and end users (consumers and businesses). It may include early-stage or start-up companies, mid-stage or scale-ups as well as established players.

The rise of ecosystem thinking

The wider business world may be waking up to the concept of an ecosystem, where several organizations work together to achieve something that none could have realized alone. Yet the payments industry has a long tradition of outsourcing, partnering, collaborating – call it what you will – across a wide set of organizations.

Consider how many parties are involved each time a customer pays a bill or sends funds overseas. And how all the parties work together behind the scenes before, during and after the moment of payment to make this happen seamlessly.

If anything, ecosystem collaboration has become even more interconnected and dynamic in recent years. Organizations are integrating themselves forward and backward in the value chain. They are offering more and different services, trying to capture more value from their customers and increase the ‘stickiness’ of their relationships.

Ecosystem thinking is beginning to outperform scale. That’s especially around accelerating speed to market and time/cost to value. But also, generating more ideas, holistic experiences and customer value.

Top tips for making partnerships work

Choosing the right partners is critical. After all, if you choose the wrong partner, your risk exposure is higher from the start. It may also be more difficult to recover from a wrong choice during the life of a contract. So, consider the following:

Are you solving problems your customers have?

It sounds simple but is worth reassessing regularly. Are you still solving your customers’ problems? If this is the purpose of the business and partnership, keeping it uppermost in your mind helps prevent scope-creep and innovation-drift from what’s really important.

Is your effort aligned with customer needs as well as business goals, compliance requirements and market gaps? Monitor progress and view alignment as a continuous process, not a one-off event.

Are you scaling effectively?

Every business wants to grow and manage increased demand without compromising performance or quality. But are you building effective, resilient and scalable technology and operations?

Technology that worked fine with a small number of customers may be overwhelmed when you add more. Similarly, processes devised for fewer customers may be overwhelmed by increased traffic.

With so many payment pathways, currency pairings and transfer timeframes, international payments can quickly become complex. Reconciliation even more so.

A unified payments platform helps simplify reconciliation on the back end. That’s usually by consolidating payments into a single format or statement, plus allowing self-service tracking via an online app or portal.

Does your partner help simplify complexity?

Working with the right partner can extract a lot of the complexity. For example, on the technical side and/or the high-touch, tedious or repetitive tasks, such as regulatory compliance.

This allows you to focus on your core business without the distraction of non-value-adding detail. In other words, differentiate on the customer-facing front end, where you can add value with how you solve customer problems. Meanwhile your partner takes care of the back end by building networks, processing payments, FX and reconciliation.

Conclusion

Scale still matters. But it’s not the only source of competitive advantage anymore. Businesses are recommended to leverage industry utilities, such as ‘as a service’ propositions. And partner smart to accelerate speed to market and time/cost to value.