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SXSW: Fintech execs say fast-paced startups need legacy partners

While financial technology startups provide new ideas and solutions for money management and customer engagement, the most successful are those that partner with as opposed to directly compete against incumbent banks and financial institutions, according to a panel of fintech advisers and executives.

The fast-moving technology startup world sometimes overlooks the complexities involved when operating in a highly regulated, complicated sphere like banking, they said, speaking March 12 at the SXSW Conference, an event that brings together thought leaders in the interactive, film and music industries. These compliance complexities make fintech a far different animal than technologies for more nascent sectors, like the internet of things and its growing numbers of connected devices.

Fintech investor Ryan Falvey of the Financial Solutions Lab said he avoids startups that aim to disrupt the industry or compete with legacy financial institutions, favoring instead those that are ready to partner with the incumbents. Still, it is a difficult proposition, he acknowledged, as fintech culture is still largely driven by startup culture, and many times attempts to partner are thwarted by cultural mismatches.

Other times startups are moving too fast for the slow-paced banking industry, he continued. Where banks prioritize being "scalable, reliable and, most of all, compliant," startups often forget that the "test and fail" model common to the tech world does not necessarily translate when dealing with vast regulations and individual personal finance.

"You have to be incredibly careful about the trust people are placing in you and be very diligent," said Joy Schoffler, chief strategy officer of fintech company Casoro Capital. "That's not easy when you're trying to be innovative and raise capital and move 1 million miles an hour."

Legacy financial institutions know the ins and outs of the U.S. banking industry, and early-stage startups often need guidance on navigating complicated compliance standards, Schoffler and Falvey said.

For all these reasons, the panelists said that partnership or combinations between the fintech startups and the legacy banking industry are more feasible than a disruption model. There is an opportunity to "build the bank of the future," Falvey said, but it will likely come through cooperation.

Jason Henrichs, founder of fintech advisory firm Fintech Forge, said the most successful fintech strategies are being implemented through acquisitions, investments, incubators, partnerships or legacy banks' building fintech solutions internally. The risk of hitting regulatory and compliance issues is too great for a startup to go it alone and disrupt, he stressed.

Of the many things a startup could gain from a combination with a traditional bank, another important piece is the actual user base, he said.

"If you look at incumbent financial institutions … they have a really important thing called customers," Henrichs said. "These technologies are doing some exciting things, but they don't have customers."