The triple whammy of risk aversion, culture shock and fear of regulation are making for slow going among fintechs trying to break into service provision at major banks. But as consumers demand better, digital led experiences, IT decision makers at the banks we all know and
hate love, must find better ways to engage with fintech startups. There are occasional bright spots and in this story, I profile Lloyds Banking Group's work to date.
The alternatve is that the fintech community will find better ways to market. That's the message coming from interviews I've recently conducted.
The current crop of fintech firms have identified service gaps they can fill with offerings developed at a low cost, to quickly gain market share. The pace of acceptance is surprisingly high among consumers - 50.2 percent of banking users globally use at least one fintech solution, according to Capgemini's World Fintech Report 2017.
In addition to getting involved with the startup innovation ecosystem, IT decision makers at banks need to become 'fintech smart' to cope with the pace of change, says fintech commentator and investor Xiaochen Zhang. He says:
[CIOs in banks] need to internalize a 'fintech price' to assess current offering costs and improve internal decision-making and strategy by hiring fintech-savvy executives and teams. They should also identify internal opportunities where one or more fintech innovations can be of help and develop pilots.
Lloyds Banking Group steps up
However, with thousands of fintechs currently in operation worldwide, identifying ideal matches is a complex task.
With so many startups out there, there is no silver bullet,
says Claire Calmejane, director of innovation and centre of digital excellence at the UK based Lloyds Banking Group (LBG.)
As Satya Nadella said in his new book, the aim is to move from a ‘know it all’ to a ‘learn it all’ culture,
Five years ago, LBG had 3.5 million online customers. Today, the bank has 13 million people banking online, 9 million of which use the mobile channel. This evolution illustrates the need to find new ways to interact with customers, says Calmejane, such as mortgage video interviews and using ‘selfies’ to open a bank account.
To some extent, change happens so quickly, but our job is also to ensure we leave no-one behind.
LBG has adopted a number of mechanisms to identify work done by fintechs that is outside its present practices. One of these initiatives includes having staff exclusively dedicated to scouting the best innovations in the market. The team acts as a “matchmaker” between fintechs and LBG business and delivery teams involved with the bank’s transformation programs, with experiments carried out through an in-house accelerator.
This [initiative] has been proven effective, with a third of our projects reaching production,
Sponsoring incubators and mentoring schemes has been another approach adopted and LBG is no exception. For example, LBG maintains partnerships with various industry bodies like TechCityUK, with whom it is part of a consortium of banks that is currently running a fintech competition. Demo Day is December 1st. Last year, LBG launched its own initiative to foster fintechs with 100 senior executives signed up to mentor ventures in developing offerings.
[LBG's internal fintech accelerator] is a good two-way exchange with senior executives sharing their experience and network, and the startups providing a view on how to run a company with speed and agility. When it comes to technologies to watch in the coming months, LBG is interested in what giants such as Facebook and Amazon are doing in payment space, but the bank plans on remaining close to the fintech community. Most of the startups that have been successful in working with us so far are on the fields of cybersecurity, data analytics, risk and reg tech, or regulatory technology – they are the ones accelerating the commoditization of our cost base and enabling us to focus on points of differentiation for our customers.
There are also challenges inherent to such initiatives, mostly around ensuring that working together creates value for both sides. According to Calmejane, LBG tries to reduce bureaucracy when interacting with fintechs and directing them to its mentorship scheme or the weekly meet ups it hosts if "immediate synergies" are not identified - it is important to stay connected, as startup business propositions may also change.
Fintech collaboration - a new frontier
In the past year, we have seen most of the B2C fintech start-ups moving into B2B and being open to collaborating together. Collaborating, however, is traditionally tricky in the financial services industry and particularly for startups. According to Fernando Castro, founder of Brazil based payments fintech BestPay, desired outcomes from partnerships between banks and fintechs are at jeopardy from the twin handcuffs of handcuffs of legacy culture and risk aversion.
Banks are very cautious about working with fintechs and keep us at an arm's length - even though they learn a lot from us. I saw cases where banks copied a service from a startup or launched something similar, but their time-to-market is often slow and by the time the offering is ready, it is no longer innovative.
Expressing a degree of angst, Castro adds,
They shouldn't see us as competitors, but as creators of opportunities,
As a way to overcome these issues, banks worldwide have been launching application programming interface (API) platforms. In these platform marketplaces that often go by the name of Open Banking, institutions retain control of their customer base while having third parties create and personalize existing products and services.
API marketplaces to the rescue
Exactly a year ago, Brazil-based online bank Original was the first in the country to make its API platform available to external developers and according to chief information officer Wanderley Baccalà, Original, the results have been "fantastic." He says:
We believe the bank has to be wherever the customer is, and APIs enable that via an Internet of Things approach of sorts, whereby the bank is available across a range of devices to make consumers' life easier.
Through the platform, startups developed new customer offerings for Original including PicPay, a digital wallet application developed based on the bank's money transfer API, as well as access to statements through social networks such as Instagram and Facebook. According to Baccalà, enabling startups to connect easily with banks is crucial to avoid being surpassed by them.
Having the right corporate culture is also really important. Internal stakeholders need to be able to think creatively, have a customer-centric approach and be open-minded in terms of possibilities that the digital economy can bring.
More specifically about the role of the CIO in driving innovation effectively by working with startups, Baccalà points out that those in charge of IT at banks will only be able to identify and implement possibilities presented by new ventures if they have a deep sector and business understanding, as well as being able to take on different opinions.
That is why it is crucial to have multidisciplinary project teams involving experts beyond IT, in areas such as products, channels, operations and security,
Working with fintechs based on APIs can also present risks. According to James Gardner, innovation expert and author, such collaborations bear serious implications to traditional banks.
[Banks] will be reduced to a 'dumb pipe', much like it happened to old network hardware players as experiences and the software underpinning them became the driver of the market. That will probably happen for banks too - and I think all this 'innovation' in banking is very much in the same vein as that of network providers trying to value add their pipes.
A consolidation of banking into big utility organizations could be in the horizon, says Gardner, with many smaller players on the edges bringing innovation to the market.
It isn't hard to see how this becomes a situation where banks are really competing entirely on cost and terms and conditions, rather than brand and experience.
As banks try different approaches to fine-tune their involvement with startups, what could be a practical approach to obtaining a return on investment? According to Gardner, while banks have been ploughing resources on engaging with fintechs, he has not seen many cases where external innovations got adopted in a large scale. Gardner explains:
This is mostly because banks are really terrible at being patient enough to get these kinds of ventures to any scale that means anything. When you appreciate the kinds of revenue that leadership in banks is used to, you can understand this.
Gardner believes a more viable strategy is for banks to wait until innovations driven by new companies have sufficient scale to play meaningfully in their own right with the acquiring institution.
That way, the innovation is proved and has a target market with revenue, with bank leadership only having to integrate and grow the proven formula, rather than trying to get something started from scratch. When was the last time you met someone in a banking leadership role that actually started a bank from scratch?
When working with fintechs, long established banks are faced with numerous dilemmas, including significant culture shock. Threading their way past cultural difference is a major impediment until the bank experiences the kind of pain that other businesses experience in the economic cycle. The problem is that while many see the threats that could emerge from new kinds of bank, plenty truly believe they are invincible and can therefore either pay lip service or pretend that change can be managed on their terms.
On the other hand, they know that customer service has to improve and in some countries, it is clear banks are taking the road to digitization seriously, albeit at a pace retailers would regard as leisurely. There are exceptions. Bank of America has a slew of projects underway designed to help shed its faceless reputation. In the UK, Metro Bank has emerged as a credible alternative to the major high street banks. In Germany, Bitwala represents an early effort to meld both modern cross border, multi-currency bank payment practices to cryptocurrency based technology. But with a twist. They're holding a first of its kind Equity Token fund raising event. Not for the faint hearted but a clue as to where this might go.
Regulatory concerns, which became the center of banks' attentions following the credit crunch of 2008, show no signs of going away any time soon. Paradoxically, I see fintechs routinely creating something first, then dealing with regulation later. Banks, on the other hand, stop in their tracks before doing anything that could potentially get them into regulatory trouble. It's not just culture, it's a fact of life.
But is Gardner right to propose a wait and see approach? Possibly, given the generally risk averse, slow moving nature of banking but that's antithetical to what customers are demanding and what fintech startups are offering. The notion of 'failing fast' Silicon Valley style, hasn't really caught on.
But the need for customer centricity expressed through the demands for digital channels as table stakes is here to stay. In turn banks are being forced to shift thinking while endeavoring to drive innovation in a controlled manner. In the end, I suspect this will require building a track record of meaningful, consistent work with fintechs that are willing to align with strategic goals rather than picking out winners from beauty contests where the startup's initial attraction (services and products based on the latest technology fad) fades or worse still, attempting to solve a problem that doesn't yet exist.