As the possible combination of digital features explodes, banking grows more complicated than ever. Which features do you prioritize? How do those features integrate with each other? What do you want to be known for in a crowded market?

What’s clear is that standing still won’t work. As we illustrate in our Ultimate Guide to the Top 2021 Bank Challenges, 87% of consumers say they visit their bank branch less often than they did before the COVID-19 pandemic, while 89% say they use mobile banking more often. The shift to digital banking has accelerated faster than anyone anticipated.

The more that consumers demand a digital-first experience, the more that banks are forced into a new way of doing business. That’s a difficult challenge, given that banks have not traditionally been digital-first companies.

Put simply, banks must explore when they should build, when they should buy, and when they should partner.

Traditional Approaches No Longer Work

In the past, the question has often been limited to two choices: Build or buy? This narrow view has resulted in banks developing their own digital solutions only to realize too late that the cost of maintaining these solutions is far higher than they anticipated — or it has resulted in banks buying a product from a technology company only to realize too late that they’ve locked themselves into enormously expensive contracts for solutions that don’t keep up with the times.

Today, banks are (rightly) realizing that they can get the best of both worlds by partnering with nimble, innovative fintech companies — companies that give banks flexibility in the range of products and services they offer.

Still, there may be instances where building or buying is also a viable option.

Here’s how to know when each of these options is right for you.

Build, Buy, or Partner: Pros and Cons

Build

Your ability to build your own digital banking products largely depends on two things: 1) the amount of capital you’re able to invest 2) the availability of developer talent. Without budget and talent, building is almost certainly a non-starter. With those two things, building can carry some benefits.

Pros to building:

• Gives you control over all aspects of your product (within the constraints of budget and talent)
• Enables you to avoid the ongoing costs associated with buying or partnering

Cons to building:

• Brings a load of technical debt as you have to maintain your own codebase
• Potentially causes a lack of focus as you work to maintain every aspect of digital banking all at once
• Comes with the risk of creating an inferior product compared to working with companies that specialize in each separate aspect of banking

Buy

Like building your own products, your ability to buy products or companies hinges on your budget. Without a sufficient budget, buying might not be an option. Still, in the right context buying can be a smart way forward. 

Pros to buying:

• Helps you avoid the long, arduous process of talent acquisition and the burden of maintaining technical debt
• Brings specialized research and knowledge from fintech companies

Cons to buying:

• Requires capital upfront
• Limits your capacity for customization
• Carries the risk of getting locked into a contract with a company that doesn’t innovative as quickly as the market demands

Partner

Partnering with fintech companies gives you a range of options that aren’t available with building or buying alone. It enables you to use flexible deployment options, including APIs and customizable feature sets. It also opens up the possibility for long-term collaboration.

Pros to partnering:

• Enables you to build an IT team that specializes in banking while working together with external developer teams that specialize in fintech
• Creates the option for flexibility, collaboration, and innovation 
• Brings a sense of ownership and responsibility to both parties

Cons to partnering:

• Requires capital upfront and some ongoing maintenance
• Limits some of the control that comes with building from scratch

The Future of Banking? Partnerships

Although there are times when it’s best to build and times when it’s best to buy, the future of banking will almost certainly center around bank-fintech partnerships. Why? Banks know the ins and outs of government regulation and industry risk better than anyone, while fintechs know digital design and experience. 

In addition, partnerships offer the greatest amount of flexibility. Whereas building requires a large in-house team and whereas buying carries the possibility of getting locked into a failed strategy, partnering is possible with just a limited team. 

The Pacemakers Partners visualize the situation in a quadrant that shows how versatile partnering can be, showing that regardless of whether you have limited skills or are risk averse, partnering can be fruitful. 

As Jim Marous, Co-Publisher at The Financial Brand, says, “When you look at most institutions today,” he says, “most don't have the depth of experience in the areas of data and analytics, technology, and actual transformation. That's where partners really come in handy.”

Ron Shevlin, Director of Research at Cornerstone Advisors, adds that financial institutions tend to be tragically understaffed when it comes to actually implementing partnerships. “I surveyed financial services executives last December,” he says,” “and more than 50% of banks and credit unions say that partnering is a critical aspect of their overall business strategy and yet, on average, most mid-sized financial institutions only have two full-time equivalents in fintech partnerships.”

In short, to win the future of banking, traditional financial institutions must invest more in partnerships. The right partnerships will anticipate and overcome the industry challenges ahead.

Want to learn more? Read the Ultimate Guide to the Top 2021 Bank Challenges.