Why partnerships between Traditional lenders and Fintechs are destined to fail 🧨

One of the oldest tails in the Fintech lending world is that Traditional lenders and Fintechs should make for great partners 

In theory, it makes total sense. Fintechs bring the tech expertise, acquisition of customers and A + user experience while traditional lenders come in with lots of capital at competitive prices. This sounds like a heavenly combination. Then why is it that this always ends in hell? 

Well in 1 simple line: Competitors can never be partners 

Let’s dive deeper  

Here is what tends to happen 

• Fintechs approach traditional lenders 

• If lucky, they are able to convince them to partner up

• It takes months to integrate

• When the integration is complete, the Fintechs celebrate it as a huge milestone due to the effort it’s taken for them to get to this point 

• Partnership starts!

• Let’s talk worse case and best case scenario 

• Worst-case scenario: 

  • The loan book is poor quality and the traditional lender either shuts the partnership or cripples it by putting up minimal capital and lots of restrictions on the kind of loans which can be done by the Fintech

• Best case scenario: 

  • The loan book quality is great. The traditional lender gets excited. They want to scale up! It’s happy days for the Fintech right? Well…not exactly

• This is where the villain in the story comes in. Enter ‘The Executive’

• Who is ‘The Executive’? It’s that person in the traditional lending company who notices the meteoric rise of the Fintech on its book. He is the eye of the tiger!  

• This Executive then proceeds to ask his associates to study the Fintech closely. His team then peppers the Fintech with questions in the name of diligence. The unsuspecting Fintechs answer the questions innocently. The team determine the strategy and decode the Fintechs plans 

• Once done, they present it to The Executive. He now makes the call. The call is go directly after the customers of the Fintech and slowly and painfully cut them out of the loop 

• The lender partnerships manager knows what’s happening. He pleads with The Executive to reconsider as this would be the beginning of the end of their partnership with the Fintech. But this is to no avail. The Executive could not care less. 99% of the traditional lender’s business is direct lending. He is not going to let 1% of the business cloud his judgement on how to run the balance 99%  

• Boom! Armed with all knowledge, customers and strategy of the Fintech, the traditional lender becomes the Fintechs arch nemesis and competitor  

A bone-chilling tale isn’t it? 

This horror has been faced by more Fintech founders than they would like to admit. Popular banks and NBFCs who all were once the darlings of the Fintech world are now publicly calling open season on customers of their once prominent Fintech partners. 

What can Fintech’s do to battle this? 

There are 3 options to solve this problem

Fintechs need to get their own lending license. This acts as an insurance policy which allows them to compete with their partner lenders on an even footing. Simply having their own NBFC license acts as somewhat of a nuclear deterrent for their lenders. The lenders know that if they do something which is against the spirit of the partnership, the Fintech is not helpless. They would simply start doing the loans directly. This keeps the power equation balanced between the two 

Now, Lord knows the number of Fintechs who have applied for an NBFC license to the RBI. If you are not feeling lucky, getting into a strategic equity partnership with an NBFC is another way to go. This has become an increasingly credible option for Fintechs, especially with lenders they have been working with for a while or plan to do deep integrations and share proprietary information with 

Lastly getting into partnerships with lenders who are platforms and are committed to not directly lending to customers is another great option. Lenders like Apollo are neutral in nature. We do not lend directly to end borrowers and only lend via Fintech partners. At Apollo, partnerships are THE business. Our customers are Fintechs and going directly after our Fintechs customers would kill the platform. This makes our incentives aligned with our Fintechs. If they grow, we grow. This allows Fintechs to build with confidence knowing they won’t be suddenly backstabbed by their lender. They can focus on building an A+ user experience for the borrowers relying on the deep partnership with Apollo 

That’s why we are the ‘AWS of Digital Lending’