Howdobanksinteractwithfintechstartups? LarsHornuf Autioetal.2018). Most recent- ly, the banking industry, one of the most traditional and conservative sectors in the economy, has been confronted with potentially disruptive technology- driven innovations and Internet-based solutions (Navaretti et al. 2017). By developing new informa- tion technology(IT-) enabled service models, startup firms and multinational technology compa- nies have in many cases created more customer- oriented and user-friendly digital applications in the banking industry, leading to growing digital SmallBusEcon doi/10.1007/s11187-020-00359-3 L.Hornuf (*) UniversityofBremen,Bremen,Germany e-mail:hornufuni-bremen.de L.Hornuf MaxPlanckInstituteforInnovationand Competition,Munich, Germany L.Hornuf CESifo,Munich,Germany M.F.Klus : T.S.Lohwasser UniversityofMnster,Mnster,Germany A.Schwienbacher SKEMABusinessSchool UniversitCtedAzur,Euralille, Franceservitization of financial products. 1 Many of these new banking solutions have also been developed by financial technology (fintech) companies. Some of the new digital innovations have the potential to reshape or even crowd out some of the business activities of more traditional banks. As a result, digitalization and platform-enabled fintechs have forced banks to reconsider their corporate bound- aries and make them more permeable to market interactions (Kohtamki et al. 2019). More perme- able organizational forms such as strategic alliances allow banks to confront the threat of technology- driven firms and offer traditional banks new advan- tages to benefit from innovations developed by fintechs in ways different from the simple “make- or-buy” decision (Borah and Tellis 2014; Jacobides and Billinger 2006). For example, banks have established fintech incubators and accelerators to enable innovations while maintaining control through a minority share in the firms that are built or supervised. A lack of legacy infrastructure and comparatively low level of organizational complexity often enable fintech firms to be more agile, innovate faster, and be moreradicalintheirapproachtoinnovation(Brandland Hornuf2020).Bycontrast,itismoredifficultfor tradi- tional banks to adapt to some of the new technological developments because they need to comply with more extensiveregulatoryrequirements.Often,alargernum- berofstakeholdersneedtobeconvincedwhenadopting far-reachingorganizationalchangesinatraditionalbank (Klusetal.2019).Moreover,digitalserviceinnovations typically crowd out banks existing distribution chan- nels (Vendrell-Herrero et al. 2017), thereby reducing banksincentivestointroducenewdistributionchannels on their own. The sluggishness of traditional banks to adapt to digital challenges not only has implications at the individual bank but also affects the entire financial ecosystem. Given the legacy infrastructure and high level of organizational complexity inherent in many banks, they need to re-organize their ecosystem to im- prove the digital services offered to retail and business clients(forrelatedworkonmultinationalindustries,see Sklyar etal.(2019). In this article, we analyze which characteristics of banks are associated with different forms of alliances with fintech companies. The Financial Stability Board oftheBankforInternationalSettlementsdefinesfintech as “technologically enabled financial innovation that could result in new business models, applications, pro- cesses,orproductswithanassociatedmaterialeffecton financial markets and institutions and the provision of financial services” (European BankingAuthority 2017, p. 4). We are particularly interested in the number of bankfintech alliances that have been established in developedeconomiesandthefactorsrelatedtodifferent forms of alliances such as investments or product- relatedcollaborations.Finally,weinvestigatetheimpact ofthese alliances onbanks marketvalue. 2 The literature on financial innovation in general and bankfintech alliances in particular is scarce. First, our analysiscontributes tothe empirical literatureonfinan- cial innovation. Lerner (2002) and Miller (1986)pro- vide empirical evidence that financial innovation, as measured by the filing of financial patents, has been increasing since the late 1970s. Moreover, Scott et al. (2017) find that the financial industry had historically spent a large share of expenses on IT, which reached morethanone-thirdofallexpensesin1992.Onereason for the high share of ITexpenses was that the financial industry employed computers early on as part of their business model. Historically, innovations (e.g., the au- tomatedtellermachine)haveledtochangesinfinancial organizations and services (Merton 1995). The quality offinancial patents and financial innovations was,nev- ertheless, often low (Lerner et al. 2015). Therefore, the 1 For an empirical structuring of the servitization literature, see the study of Rabetinoetal. (2018). In a classic sense,digital servitization refers to “the provision of digital services embedded in a physical product”(Vendrell-Herreroetal.2017,p.69),adefinitionthatisbased on research conducted in the manufacturing industry (Coreynen et al. 2017; Kohtamki et al. 2019). The financial industry views the term “product” morebroadly, asfinancial products do not physically exist. Inthefinancialindustry,servitizationreferstothewayfinancialprod- uctsarenowofferedandbrokered.Newservicesbecameavailablefor traditionalfinancial products that did not exist a decade ago and were enabled by digitalization. For example, application programming in- terfacesallowfintechstoscreenthenumberofbankcustomersandto offer new services, such as account switching or the automated switching or termination of an agreement, based on the information from the account and the algorithmsthefintechdeveloped. 2 In this article, we use the term “alliance” to refer to any type of interaction between fintech startups and banks. This term is widely used in the “make, buy, or ally” literature (Borah and Tellis 2014; Jacobides and Billinger 2006). As will become clear, alliances com- prise minority and majority investments, product-related collabora- tions, and some other forms. Thus, alliances cover a broad spectrum of possible interactions with fintechs. While some of the terms used here differ somewhat from those in Hagedoorn and Duysters (2002), overall,wetakeasimilarapproachinthecontextofexternallysourcing innovativecapacities. L.Hornuf etalfinancial industry was perceived as one of the least innovative.Still,scantempiricalresearchhasinvestigat- ed whether fintech startups have pressured traditional banks to innovate or even forced banks to engage in strategic alliances with them. We fill this gap in the literature by analyzing bank characteristics that are as- sociated with different forms of alliances with fintech companies. Second, our analysis contributes to the emerging literature investigating not only individual business models but also the fintech market in its entirety. HaddadandHornuf(2019)analyzefintechsin55coun- tries and provide evidence that markets witness more fintechformationswhentheeconomyiswell-developed and venture capital is easily accessible. Other relevant factorsfortheformationoffintechsareaccesstoloans, secure Internetservers,mobile telephone subscriptions, and a large labor force. Cumming and Schwienbacher (2018)findthatdifferencesintheenforcementoffinan- cialregulations ofstartupsandbanks afterthe financial crisis contributed to venture capital investments in fintech startups. Puschmann (2017) provides a model to categorize the industry. Navaretti et al. (2017,p.17) conduct a conceptual analysis on the relationship be- tweenfintechsandbanksandfindthatthe“gameisstill open” and“a lot ofworkliesahead” forthe industry. ArelatedarticletooursisthatofBrandlandHornuf (2020), who run a bankfintech network analysis for Germany and find that most relationships are product- related collaborations. They argue that this is because mostfintechsdevelopanalgorithmorsoftwaresolution, the value of which can only be determined over time, whenthesoftwarehasbeenadaptedmorethoroughlyto customerneeds.We add totheir findingsbyinvestigat- ing the particular bank characteristics associated with a bankfintechalliance.Thesealliancesoccuragainstthe backdropthatthearrivaloffintechsmodifiesthesupply chain interdependency of banks and thus also estab- lishes new ecosystems (Kohtamki et al. 2019; Vendrell-Herrero et al. 2017). More precisely, we con- sider different forms of alliances, such as product- related cooperation and minority and majority equity stakes,whichtendtobeclassifiedinthetransactioncost literatureas“hybridstructures”(JacobidesandBillinger 2006; Williamson 1991), and investigate bank charac- teristics (e.g., profitability) associated with these alliances. Finally, we also contribute to the “make, buy, or ally” literature (Borah and Tellis 2014; Jacobides and Billinger 2006), which evidences a broad range of interactions that firms can have with other firms in the market, particularly in the context of innova- tion management. In particular, our results on why certain types of alliances occur (e.g., investments vs. product-related collaborations) are consistent with incomplete contract theory (Aghion and Bolton 1992; Grossman and Hart 1986). In a broad sense, we also contribute to research on servitization, es- pecially the service science stream of the literature that Rabetino et al. (2018) identifies and that focuses on business-oriented approaches to servitization (e.g., Baines et al. 2009), the systematic develop- ment of new services (e.g., Bullinger et al. 2003), and the role of organizational, technological, and human factors in the configuration of new services (e.g., Spohrer et al. 2007; Vargo and Lusch 2011). The financial industry is a relevant sector to exam- ine in this context, given the new service strategies banks and fintechs are currently developing, the additional services incumbents and new market par- ticipants add to existing financial products, and the novel service packages now being offered by plat- forms such as B, Mettle, and N26. Digital servitization in the banking industryinitiated an evolving ecosystem that results from the digitaliza- tion of financial products and new IT-enabled service models. Industriesaffected bydigital servitization typi- cally confront upstream and downstream competition (Barrettetal.2015);thecurrentchangesinthefinancial industryalsoaffectbothupstream(throughnewservices andservicepackagesoffered)anddownstream(through enhanced customer services and novel distribution channels) competition. In the former case, dis- intermediated finance solutions such as crowdfunding giveretailinvestorsaccesstonewinvestmentproducts. In the latter case, the emergence of various platforms that allow customers to directly compare prices of dif- ferent banks has modified how financial products are offered anddistributed. The structure of this article is as follows: In the “Literature review and hypotheses” section, we outline our theory and hypotheses, and in the “Data and methods”section,wedescribeourdataandthemethods applied. In the “Empirical results” section, we present the results. The “Discussion” section provides an ana- lytical discussion, and the “Conclusion” section con- cludes with implications for practice, and outlines ave- nuesforfutureresearch. Howdo banksinteractwithfintech startups2Literaturereviewandhypotheses To increase their profitability, banks have historically developed financial innovations (Scott et al. 2017)and morerecentlyembraceddigitalservicesasanewengine ofgrowth(Barrettetal.2015).Becketal.(2016)show thatfinancialinnovationsarepositivelyassociatedwith bank growth. The recently emerging service science literature also suggests that the development of new service models can reduce costs to firms and add value to customers (e.g., Sakao and Shimomura 2007). Simi- lar to the recent transformation of century-old business models in the computer equipment and software indus- try, new IT-enabled service models and digital servitization are likely to enhance the financial perfor- mance of incumbent firms in the banking industry (Kohtamki et al. 2020; Spohrer and Maglio 2010). Moreover, novel digital infrastructures such as the blockchain technology can facilitate the combinatorial potential for enhanced service innovations (Yoo et al. 2010). In their study on 50 Swedish advanced service providers, Sjdin et al. (2019) examine how relational governance for the provision of advanced services can enhancethefinancialperformanceofafirm.Theyiden- tifyaneedtoapplyasetofdiverserelationalgovernance strategiestogeneratesuperiorfinancialperformance.In line with these findings, we derive testable hypotheses about what drives bankfintech interactions under the premise that alliances are the result of mutually benefi- cial transactions between banks and fintechs (Coase 1960; Scott et al. 2017). These transactions are meant toenhancethebanksvaluethroughtheimplementation of financial innovations. In other words, bankfintech alliances aim to improve the market value of both fintechsand banks. While early research on the boundary of firms pri- marilyconsideredmarkettransactionsversustheacqui- sitionoffirms,andthustheinternalizationofexternally developed products or services (starting with Coase 1937), recent research on organizations has evidenced various other forms of interactions that could lead to alliances for the joint development of products or ser- vices and the exploitation of innovation opportunities (Borah and Tellis 2014; Jacobides and Billinger 2006). Current innovations pose particular challenges to the optimal boundary of banks, for which market transac- tions could provide more flexible solutions to the in- creasing digitalization of organizations and the emer- gence of platform-based business models in the financial industry. If banks cannot develop new digital servicesthemselvestoreapthebenefitofdigitalization, they must adopt a more permeable structure that facili- tates interactionswithfintechstobettermatch financial service capabilities with the particular needs of the market. Fintechs might collaborate with banks for several reasons.Throughanalliancewithanestablishedplayer in the financial industry, fintechscan obtain access to a broader customer base, gain access to superior knowl- edge in how to deal with financial regulations, and improve their own digital services. Some fintechs en- gage in an alliance with a bank to obtain access to a banking license, which in many cases would be too cumbersome and too expensive for a fintech startup to obtain(Klusetal.2019).Bycontrast,bankscansecurea competitive advantage by collaborating with fintechs that are developing or have already developed a better way to provide financial services. In some cases, investinginafintechfirmcangiveabanktheexclusive rightstouseaspecificapplicationorlicense,enablingit