Alliance Banking: The Rise of Bank-Fintech Partnerships
By Kabo Phage and Lebogang Mabetha | November 2024

KABO PHAGE
Macro-Prudential Specialist | SARB
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LEBOGANG MABETHA
Senior IT Risk Analyst | SARB |
1. Introduction
In today's rapidly evolving financial landscape, the synergy between traditional banks and innovative fintech firms (fintechs) is reshaping the way we think about banking. This collaborative approach leverages the strengths of both sectors to offer enhanced financial services and products, improve customer experiences, and harness cutting-edge technological solutions. As banks seek to modernize and fintechs aim to scale their operations and reach, these partnerships are becoming increasingly vital. They drive a new era of financial innovation and accessibility, enabling both sectors to thrive in a competitive market. In this blog, we will explore the concept of alliance banking, the nature of these partnerships, the distinction from Banking as a Service and the motivations behind them.
2. Understanding alliance banking
An alliance or partnership banking relationship, or sponsored banking, affiliate banking, or partnership banking, is a collaborative agreement between a licensed banking institution and a non-banking entity, such as a fintech firm. This formal arrangement allows the non-banking entity to offer specific banking products and services, such as savings accounts, credit or debit cards, and loans, under the bank's license, leveraging the strengths and resources of both parties
These collaborations aim to offer customers a wider array of financial services and products, expand market reach, gain competitive advantages, and drive innovation[1].By forming these alliances, banks can enhance their services, streamline processes, and adopt modern technologies without the need for significant internal investments. Meanwhile, fintechs benefit from the banks' valuable trust and compliance expertise.
Alliance banking marks a significant shift from a few years ago when large and dominant banks believed they could compete directly with fintechs and each other. However, traditional banks often face challenges such as a lack of appropriate talent, conservative internal processes, and legacy systems that are not as agile. Embracing fintechs as a source of capability can be mutually beneficial for both banks and fintechs[2]. Alliance banking typically manifests through different partnership models, depending on how the bank and the fintech collaborate to offer innovative financial products and services. The models are briefly discussed as follows:
1.
A referral partnership involves a bank directing its customers to a fintech firm to enhance its existing services with innovative solutions or features that the bank does not offer. For instance, the bank might refer its customers to a fintech specializing in peer-to-peer lending[3], which are services the bank may need to improve on. These partnerships provide customers access to alternative lending options, while the fintech benefits from increased referrals. Both parties agree on a percentage fee to ensure mutual benefit and share the earnings.
2.
In a white labelling partnership (or technological partnership), a bank acquires a customizable white label financial products or services[4], while the fintech acts as the technology provider. For example, the bank could introduce a new mobile banking application (app) under
its own brand, including features like savings and investment products, credit and loan services, utility, and airtime purchases, as well as mobile money transfers. While the app carries the bank's branding and is marketed as its own product, the fintech firm provides the underlying technology and infrastructure. These arrangements allow the bank to offer advanced digital services without developing the technology in-house while the fintech firm manages the backend operations and ensures the app runs smoothly.
3.
A hybrid partnership is a collaborative arrangement, where fintech products and services are offered under the bank's brand or jointly under both brands (co-branding). A compelling example of this type of partnership involves a bank collaborating with a fintech firm specializing in "buy now, pay later" services[5]. The fintech leverages the bank's robust compliance and financial infrastructure to offer seamless payment solutions to consumers. This partnership allows the fintech to focus on customer experience and innovation. At the same time, the bank ensures regulatory compliance and manages the financial backend. These partnerships are typically formed to achieve common objectives, ensuring mutual benefit and competitive advantage[6].
In addition to the previously mentioned partnership models, banks are increasingly viewing
Banking as a Service (BaaS)[7] as a crucial component of alliance banking. This shift is motivated by BaaS's enhanced flexibility, specialized offerings, broader reach, and cost efficiency, which incentivize bank-fintech partnerships. BaaS involves the provision of banking products and services through
third-party distributors, often referred to as
“outsourcing," allowing non-banking businesses to integrate with regulated financial infrastructure.
However,
is alliance banking truly synonymous with BaaS?
This
blog argues that alliance banking and BaaS represent two distinct partnership models, each with unique characteristics (Box 1 highlights the differences). Alliance banking typically involves collaborative partnerships, while BaaS allows fintechs to leverage a bank's infrastructure[7] to offer banking services under their own brand, with the bank remaining in the background[8].
Understanding this distinction is crucial for financial regulators as it defines the scope and nature of these partnerships and the associated regulatory responsibilities, such as ensuring proper oversight, risk management, and compliance with the applicable financial sector laws.
Furthermore, clear differentiation helps set precise supervisory and regulatory frameworks, mitigate risks, and protect consumer interests while fostering innovation in financial services. Supervisors must closely monitor these partnerships, focusing on regulatory compliance, data security, risk management and operational resilience. This oversight is crucial to maintaining a sound financial system.
Box 1: Key differences between alliance banking and Baas[9]
Feature |
Alliance Banking |
BaaS |
Partnership Structure | It involves a formal partnership or joint venture where both entities share resources and collaborate closely. | Involves a service-provider relationship where the bank provides infrastructure through Application Programming Interfaces (APIs) to fintechs who independently offer the services to their customers. |
Operational Model | Focuses on combining the strengths and resources of both entities to enhance service offerings. | Focuses on providing a platform and infrastructure for fintechs to build and offer banking services. |
Marketing and Branding | It often involves co-branded products, where both brands are visible to the customer, and the bank-fintech arrangement is often known by the end customer. | Allows fintechs to offer banking products and services under their own brand without the end customer necessarily knowing about the underlying bank. |
Target Audience | It can target the bank's existing and fintech customers. | Typically targets fintech companies, startups, or non-financial businesses looking to offer financial services. |
4. The rise of alliance banking: what is driving the trend?
Alliance banking has undoubtedly appeared as a powerful trend in the ever-evolving financial sector. But what exactly is driving this shift? Let us examine the key factors, drawing insights from academic and media reports.
1.
Technological Innovation
One of the most significant drivers of alliance banking is the rapid pace of technological innovation. Traditional banks increasingly collaborate with fintechs to use cutting-edge technologies and improve cost efficiency. According to Ernst & Young[10], banks with a clear digital strategy are more likely to form alliances with fintechs. These partnerships enable banks to integrate advanced technologies like blockchain and artificial intelligence to enhance efficiency and expand their customer reach.
2.
Meeting Market Demands
Today's consumers expect seamless, personalized, and convenient banking experiences. To meet these demands, banks are partnering with fintechs that specialize in customer-centric solutions. Fintechs are adept at utilizing data analytics to gain insight into customer behaviour and preferences. By partnering with fintechs, banks can harness these capabilities to stay competitive and attract tech-savvy customers.
3.
Strategic Advantages
From a strategic standpoint, alliances offer numerous benefits to banks. Partnering with fintechs enables banks to access new markets, diversify their product offerings, and reduce operational costs. Academic research[11] shows that banks frequently engage in product-related collaborations with fintechs, particularly in the payments sector. These partnerships enhance the bank's value proposition and can lead to significant cost efficiencies. For instance, when a sound fintech firm, known for its effective management, and financial health, launches a debit card in partnership with a bank, the bank can use the fintech's reputation and innovative strengths, which can positively impact the bank's market capitalization[12].
4.
Financial Inclusion
Bank-fintech partnerships are also instrumental in promoting financial inclusion. By combining their resources and expertise, these collaborations can extend financial services to underserved and unbanked populations, broadening access to essential financial products and services[13].
5. Conclusion
In conclusion, the rise of alliance banking in the financial sector is driven by technological innovations, market demands, and strategic advantages. As the financial landscape continues to evolve, these factors will play an increasingly pivotal role in shaping the future of banking. Nonetheless, this evolution also introduces complex relationships between banks, fintechs, and their customers, necessitating the attention of financial and competition regulators.
By forming strategic alliances, banks and fintechs can leverage innovation, meet customer expectations, and achieve sustainable growth. However, increased regulation for banks will necessitate a stronger focus on risk management, thorough evaluation of fintech partnerships, and enhanced supervision of operational resilience. For fintech firms, this will mean adapting to a broader regulatory scope, particularly in areas of financial soundness, financial crime, competition law compliance and consumer protection.
[1] Al-Sowaidi ASSS & Faour AMW (2023). “Fintech Revolution: How Established Banks Are Embracing Innovation to Stay Competitive," Journal of Business and Management Studies, Al-Kindi Centre for Research and Development.
[2] Boston Consulting Group (BCG) and QED Investors titled Global Fintech 2023: Reimagining the Future of Finance. Available
here.
[3] Peer-to-peer (P2P) lending is a method of financing in which individuals or businesses borrow money directly from other individuals, bypassing traditional financial institutions like banks. This process is facilitated through online platforms that match lenders with borrowers and handle the loan application, credit assessment, and repayment processes.
[4] White label financial products or services are created by one company and rebranded and sold by another company as if they were their own. This allows the selling company to offer a broader range of products without having to develop them from scratch. A common example is when a fintech company offers bank accounts, debit cards, and payment services under its own brand by using a partnering bank's banking license.
[5] Fintechnews Africa (2024) 'Buy Now, Pay Later Use on the Rise in South Africa", Fintechnews Africa, 28 June. Available
here.
[6] Feyen, E. Frost, J. et al. (2021). “Fintech and the digital transformation of financial services: implications for market structure and public policy." BIS Papers, No 117. Available
here.
[7] Banking as a Service is reconfiguring the banking value chain by enabling third-party distributors for fintech firms to offer banking products and services by integrating non-banking businesses with regulated financial infrastructure, BaaS offerings are enabling new, specialized propositions and bringing them to market faster. Retrieved from Deloitte “Banking as a Service, Explained (2021)". Available
here.
[8] BIS Note from the Risks and Vulnerabilities Assessment Group
Deep-dive investigation on Banking as a Service (2023) 22 September 2023 BS/23/57.
[9] Multiple sources namely:
- Hallett, N, (2022),“BaaS, Platform Banking and Open Banking Explained" Available
here.
- Fintechna (2022), “What is banking as a service and How if difference from Open Banking?". Available
here.
- Persistent System Whitepaper (2021), “Understanding Banking as a Service: The Future of Banking" .Available
here
- Temenos Report (2021)," Open Banking and the Rise of Banking as a service". Available
here
[10] EY (2021), "Collaboration at the Core: Evolving Partnership between Banks and Fintechs, ". Available
here.
[11] Hornuf, L., Klus, M. F., Lohwasser, T. S., & Schwienbacher, A. (2020). “How do banks interact with fintech startups?" Small Business Economics, 57, 1505–1526.: Net-Zero Banking Alliance 2022 Progress Report. United Nations Environment Programme Finance Initiative.
[12] A bank's market capitalization, also known as market valuation, is the total value of the bank as determined by the stock market. It is calculated by multiplying the current stock price by the total number of outstanding shares.
[13] Remy Carole, (2024). “Banking-fintech partnership can drive a new era of financial inclusion". Available here.
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