Legacy technology systems, compliance and regulation are all much-debated barriers to innovation within the banking industry. The perceived innovation gap between the banking industry and fintech businesses is leading to a jump in M&A activity in some sections of the market and whilst it might seem like a natural step, it could have potentially undesirable consequences for their long term innovation game. Simply ‘bolting on’ a new wheel won’t make the car go faster but a better engine will.
According to PwC, 95% of traditional banks are in a transitional phase and believe they could lose part of their business to fintech companies. Yet, 25% of banks questioned said that they simply don’t engage with fintech businesses – despite them potentially holding the key to the service transformation that customers are increasingly tempted by.
Certainly our experience tells us that collaboration is not only critical but also possible. Both banks and fintechs have much to gain from learning from each other with the sum gain being the ability to innovate digitally, while accelerating time to market and time to business value – safely and securely. If 2015 was the year of the fintech disruptor, 2016 is absolutely the year of the fintech enabler.
How can banks adopt ‘fintech’ culture?
There are some discrete cultural norms that are ever present in any fast growth business – the overall goal to create the best technology to meet or even get ahead of consumer demand is a mandate from the leadership team and followed by everyone. They want to get something together that works quickly, get buy-in (from investors and / or customers), adapt, then scale. These businesses put the right people in the right places leveraging skills, passion and market insight in the most efficient and effective way. Fintechs are smaller and teams are often cross-functional covering innovation, development and operations. Banks have a real opportunity to adopt this approach to talent distribution.
Bank IT departments are also in the enviable position of knowing exactly how customers use the bank’s existing technology and where the real bottlenecks are. Rather than chasing the latest fad or innovation ‘trend’, banks can leverage their tech savvy teams, combine their insight with the vast amount of customer data they continually gather and create products and services that fix everyday customer problems and challenges with money management.
The fintech approach of thinking ‘lean’ also applies – create something that works and get it to market for testing quickly. Within a grand strategic innovation goal, there are hundreds of small iterative and incremental steps to take – test cases that can be integrated into legacy systems but decoupled from legacy processes. Banks, like fintechs, can show viability and then ROI quickly by adopting this ‘two-speed’ approach to IT, while saving the huge cost of traditional test/release cycles.
What do fintechs need to understand about banks?
Collaboration requires understanding by all parties involved. Last month we gathered a group of some of the most exciting fintech businesses in a room to debate whether fintechs and banks can really work together and if so, what steps need to be taken and factors need to be considered.
We agreed that fintechs need to present a commercial case – what will they do to really help the banks open new revenue lines and reduce operating costs? All too often, early stage businesses don’t look beyond their next funding round and are driving towards an exit rather than truly selling a long-term proposition to get banks ahead of the curve. The commercial model needs to offer flexibility – the SaaS, PaaS, ‘consume on an as needed basis’ propositions resonate well.
Unlike fintech founders, the bank CEOs’ primary concerns don’t revolve around getting the latest version to market or identifying where the next cash injection will come from. Bank CEOs are kept awake at night thinking about Net Promoter Scores (NPS). No matter how shiny the app or service, if it doesn’t immediately do what it needs to do this can really impact customer satisfaction.
When adopting new technologies, there is a significant risk because if something goes wrong the penalties are huge. Consumers may want the latest features but they also trust their banks to keep their money 100% safe and to be stable, reliable and secure. This agreement between banks and customers’ needs to be at the front of mind for those of us developing new services.
A catalyst for change
The forthcoming Payment Services Directive 2 is expected to be a real catalyst for change and banks can use it to their advantage – creating winning propositions in collaboration with fintechs. Imagine spend analysis that is easy as checking the weather or transactions as easy as handshakes. Consumers expect 24/7, on-demand, personalised service in every walk of life. Banks play an absolutely vital role in our economy – safeguarding our money. If fintechs can approach banks with understanding and consideration and banks can embrace the best bits of fintech culture there is an opportunity for all parties to benefit from the tidal wave of innovation and consumer behavioural change that is heading our way.