Financial institutions are staffed by experienced, well-educated, highly paid individuals. Do they need to partner with financial technology (fintech) firms or bring in consultants– surely they can throw money at any problem?
Perhaps. But as 19th and 20th century economic examples of Comparative Advantage teaches us, combining powerful with nimble can offer positive outcomes.
Banks employ armies of consultants and contractors, extracting talent and ideas where they can. Front-line bankers collaborate frequently, whether to syndicate / participate in financings, pool risk, or simply work with smaller entities on specific transactions.
Be it a centralized approach (where an innovation team develops and/or curates new initiatives), or decentralized model (where each business unit charts its own fintech solutions) or hybrid path (innovation and business units sync agendas), financial institutions are increasingly learning from fintech[1] to keep up.
Some relationships seem to progress beyond pilot to licencing & white-labelling to acquisition, but seeing the sheer number of fintech ‘beauty parades’, many of these bank learning experiments seem to stagnate or fizzle out.
With all the hackathons, accelerators, innovation challenge demo-days, industry conferences etc., one can’t help form the impression there are now too many trials & tests taking place simultaneously! What we haven’t seen sufficient evidence of, are real partnerships that extend beyond the pilot. Missed opportunities.
People in financial institutions worry about risks. Vendor selection is risky: team size, traction, funding often matter as much as the value the fintech’s application(s) could provide customers.
Understandable, given regulatory and fiduciary constraints. Having said that, as seen in the financial crises of 2007 and 2008, risk to institution is far greater in its trading and counterparty exposure than working with a small, probably under-resourced supplier!
Financial institution legal teams are adept at handling liability across multiple parties, hence for business line and/or innovation teams, what should be more important, are the customer proposition(s) that can be safely and quickly addressed to profitably deepen the customer relationship.
Given the sums spent on technology and contractors to keep legacy systems running, what can be learned from start up teams who focus on specific problems, segments or propositions, could outweigh these cost and management bandwidth concerns. Banks tend to pursue relationship-driven strategies backed by extensive resources, whereas fintechs start with product-driven approaches. A combination of both can yield benefit on all sides.
The challenge is finding the time to scan and curate solutions that yield positive benefit to customers and institutional risk. From numerous discussions with financial institutions of differing size and geographies, often this task is delegated to an innovation nominee (either from within the business, IT, or a central innovation team). And these days, these teams are overwhelmed with choice.
While delegating the initial scoping makes sense to the ex-banker in me, I believe the process would be more fruitful on both sides (bank and the fintech) with better quality frontline senior engagement. For instance, if looking at an SME banking/lending proposition, someone from the top 2-3 of this division should be spending 1 hour a week at least on new technologies and customer insights.
Without strong P&L sponsorship, clear strategic perspective and strong customer relationships experience (and understanding), I believe the wrong problems get prioritized and solved. In a tech-driven innovation cycle, senior management, mid-management all have to focus on customer journeys and be looking at ways to improve.
In a large bank, I came across many instances where the person dealing with supply chain finance did not want his SME banking or corporate banking colleagues to have access to a multi-segment solution. And conversely, corporate banking folks didn’t care about SME banking (or the other way around). The reason was very simple: revenue share and recognition. As a product innovator trying to better understand success dynamics and innovation gaps in business lending, it was clear that I needed to be speaking to leaders with a vested interest in the success of all these teams!
Revenue recognition agendas aside, senior bankers, particularly in developing markets, also grapple with a key issue: people. Compared to large global institutions, regional and local banks have smaller workforces and tech stacks. Banking teams that are both customer centric and tech savvy are difficult to retain in intensely competitive job markets. Transitioning from analogue customer propositions/manual workflows to tech-led solutions can stretch the bandwidth of even the most talented teams.
Transitioning, training, change management. Even with budgets & outsourced technical and consulting resources, financial institutions still need day to day investment in people. As one regional bank in Africa explained “culture is the major hurdle. If we can’t figure out how to improve relationship manager productivity, throwing new technology at them won’t fix anything”.
Tech spend is also broken down differently across institutions. In some, the approach is strategic and organizational: “we see technology spend in two buckets, transformation and reinvention. Transformation involves training and change management to improve what we have. Reinvention, give us products or segments we don’t have today”.
As to how the institution navigates through transformation and reinvention, the speed and efficacy goes back to management bandwidth. Bankers will add that “we’re open to partnering on both, but it’s a question of timing and time available”.
In other institutions, priorities can be product or customer segment based. Whatever the case may be, financial institutions live in interesting (and challenging) times, with change coming from all directions.
Regulators in some markets, are imposing open standards to drive interoperability and collaboration with fintech[2].
A real opportunity remains, in my opinion, for small to mid-size national or regional institutions to accelerate their ‘transformation’, ‘reinvention’, or own digital journeys. Whether privately, or in partnership with state governments and central banks, as seen in some economies.[3]
Delegating to the right resources internally, to navigate the numerous choices to be made, is in my opinion, a key success factor.
Risk management needs to be balanced against competitive benefits, and here, banks need to be more practical. Where vendor and solution selection is expensive and time-consuming, perhaps consulting arrangements with the fintech firms may be a stepping stone to vendor qualification.
While working with big names is a safe option, working closely with smaller fintechs (many of whom will have seasoned bankers) who have managed to create products on limited resources can offer real opportunities to cross pollinate – both can learn from each other, strengthening the ecosystem and potentially creating new customer solutions. In a world of mobile money, connected POS devices and alternative scoring methods to drive up financial inclusion, only a combined approach can successfully widen financial services access.
[1] A few recent whitepapers summarize partnering cases and approaches (How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines -Center for Financial Inclusion at Accion and Instititute of International Finance; and Unleashing the potential of FinTech in banking – EY ).
[2] In Europe, the PSD2 directive aims to open bank API data to (customer authorised) third party regulated service providers who can increase and improve services available to banking customers. https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2366/law-details_en
[3] http://www.thehindu.com/news/cities/Visakhapatnam/steps-afoot-to-promote-vizag-as-fintech-destination/article18962634.ece;