Collaboration models form the basis for future success

The rollercoaster experience of disruption to long-term relationship has been a breathtaking and sometimes stomach-churning ride for fintech and banking alike. Commercial “collaboration” is often hard to achieve, so here we aim to pin down more closely, from a legal perspective, what is meant, what is covered and where the pitfalls might lie.

Clear objectives

Commercial collaboration is achieved through a number of differently structured arrangements depending on the parties’ required outcomes. We work with a party to identify its key performance and success metrics as an essential prerequisite to successful collaboration. Possible structures include joint ventures, consortia and partnership agreements, services arrangements (including banking-as-a-service, software-as-as-service and white label banking), financing agreements and acquisitions. Startup incubators offer early stage, technology-friendly hubs with a mix of financing, professional advice, data access and a distribution network, but tend to be very early stage and we will not cover these in more detail here. We focus on the recent success of longer term, structurally integrated collaboration through consortia, services arrangements and increased M&A activities.

Collaboration models

A formal joint venture (JV) arrangement involves parties entering into an agreement providing for shared ownership of an entity or a project. The terms of the agreement will often cover capital contributions, allocation of liabilities, valuation matters and determination of profit-sharing, arrangements regarding governance, ownership and transfer, major decision-making and day-to-day running, restrictions on parties including exclusivity, confidentiality, tax matters and more. The use of traditional JVs in this space has been relatively prevalent, and some of the potential cons (culture clash leading to project failure, lack of proper sponsoring, failure to integrate and effective disintegration once the initial excitement has faded) have been clear in many instances. Understanding these realities during the contract phase is essential and is an area where an experienced international law firm like DLA Piper can guide the parties through the negotiation process with the aim of establishing a longer lasting relationship that meets the key objectives of the parties.

An increasingly prevalent JV arrangement is the multi-party consortia. Success in the technological revolution of financial services involves multiple elements that may depend on critical mass in market penetration, access to new technology and or developments in regulation and market infrastructure. Success metrics may depend on broad interoperability or wide adoption to achieve commercially viable solutions. Consortia involve multiple parties, potentially including a number of institutional incumbents who may be coordinating to promote interoperable development of a market solution, potentially alongside fintech and other technology service providers. Key issues arise around handling of data, confidentiality, competition matters and exit arrangements. Success may be wider industry buy-in, risk sharing and cost savings – however, this approach may suffer from a lack of ability to make decisions and potential competition/anti-trust concerns around commercialisation of the outcomes. We have worked on a number of multi-party consortia, including working through industry bodies such as GDF and supporting initiatives through the FCA Sandbox to provide an essential bridge in understanding the regulatory and legal constraints the consortium may be subject to.

Services arrangements can include banking-as-a-service and software-as-a-service frameworks and white-label banking. These structures enable licenced entities such as banks to work with fintechs bringing technology and software, usually framed as an outsourcing arrangement. The contractual basis is absolutely key and the regulatory implications for the regulated party have to be accommodated in a detailed manner, but with sufficient flexibility to enable potential innovation. Drivers might include outsourced technology provision (eg cloud arrangements) to an external services provider. The standards required can be stringent and complex and the last few years have seen fintech businesses maturing to enable collaborations to be more successful. We also have experience with fintechs providing services to other fintechs, and in some cases becoming the regulated entities that they previously sought to collaborate with. Fintechs themselves may offer licensed services as part of a platform arrangement for other fintechs to build front-end offerings on. While these models are to some degree a form of complex subcontracting, the blend of regulatory obligation, pass-through requirements, reporting, data management and innovation means that the contractual basis underlying the fee-paying services are complex with potential for dispute if not properly legally established and implemented.

Opportunities

By collaborating with fintechs, banks are able to extend their product range and gain access to new markets, save money on product development and concentrate on more profitable business areas that leverage their expertise. Banking-as-a-service and white label banking (where the presence of a separate regulated bank services provider is kept behind the scenes and the fintech firm controls the whole of the client interface) have become business lines in themselves. The commercial realities of these relationships require technical understanding, extensive documentation, risk mitigation and dispute resolution mechanics that are flexible enough to operate in the ever-changing surrounding regulatory landscape. Commercially minded and adaptable legal advisory teams are required.

Finance and M&A

An alternative to these collaboration models is to obtain a stake in a technology venture through financing or acquisition. With financing arrangements, the financing party takes a step back from the operational side, but focusses on the financial return. Financing may be in the form of a pure debt structure or entail profit participating arrangements established via either notes or equity investment structures. This allows an innovative business to run itself to a large degree. Key negotiation points include material decision-making aspects, where the financing party may require a veto, surrounding support and advice (in the venture capital/debt and quasi-venture environment), and the pricing/valuation/conversion trigger and exit arrangements, as applicable, which will all require careful consideration on a project-by-project basis.

Finally with acquisitions, we saw a steep rise in M&A activity in the fintech space through 2019 and early 2020, with this having flattened out in the second half of the year. Fintechs with mature, proven technologies, services or platform offerings are attractive for acquisition by larger institutions wanting to benefit from innovation and run new business lines. With such acquisitions, the pre-sale due diligence often requires legal involvement to address risk management on both sides, and negotiation of deal terms requires expert advice to ensure commercially acceptable, agreed positions can be documented, avoiding potential issues and disputes. Ancillary topics such as data protection, taxation analysis and employment advice are also often central. Each of these issues can result in fundamental challenges to the acquisition and integration of a business, and its future value and success. A clear understanding of the objectives of the acquisition and an experienced legal team to implement the terms will significantly ease the process.