Despite the burgeoning fintech startup market, the broader financial services market struggles to engage. Financial institutions want to move with the agility of a fintech, but without ‘breaking the bank’, says Tom Eck, global chief technology officer of industry platforms at IBM.According to Eck, IBM financial services clients are keen to experiment and get products to market fast, but they don’t have the freedom to make certain types of mistakes.
[Banks] see that there’s innovative, ground-breaking technologies that some of these fintechs are offering that they want to tap into, either by directly consuming those services from the fintechs, partnering or perhaps acquiring them. But there is a tremendous number of fintechs out there, a bank has no capacity to be tracking these, or any subset of these, and they wouldn’t even know which ones they should be looking at. So they asked us if we would basically provide almost like an advisory service where we would be tracking fintechs we think are most important in different segments of financial services.
While the provision of consulting services within fintech and the establishment of a business unit is not yet something fully formalized at IBM, Eck says that the process of selecting, engaging and working with new ventures is a full-time job for some and a part-time job for several IBMers globally.
A few approaches have been applied to developing relationships. First, the company wants to bring fintechs under its umbrella of products and services. According to Eck, this requires a mindset shift, but it could be advantageous for all stakeholders involved:
Fintechs like us because they see that we are a really good distribution channel for them. We have a solid legacy of having over 95% of the world’s financial institutions as our clients and long-standing relationships with all these incumbents. We know [banks’] technology extremely well and we know our way around financial services regulations as well as how to do business with financial institutions. These are all things that a fintech that’s been focusing on technology might not know as they don’t have the awareness or the time to be up to date on everything.
The procurement bugaboo
Procurement is a big hurdle fintechs usually face when dealing with a potentially large client and, in Eck’s experience, it can take anything from 400 to 600 steps for a bank to contract with a fintech. IBM sees the simplification of this process as an additional potential opportunity to facilitate work with new ventures.
Including fintech innovations in IBM’s client pitches is another way to fast-track that process, says Eck. In such collaborative dealings, IBM assets are “co-created” with startups that can add value to their offerings. IBM Cloud for Financial Services is the company's integrated environment for development of these offerings, featuring fintechs that have been cherry-picked by the firm, also called a marketplace of mainly later-stage ventures. Eck says:
It’s not just a list of names of companies and URLs to redirect you to. We actually have an integrated sandbox environment that makes it very low-friction for the developers or the engineers at the bank to experiment with these fintechs.
Under such projects, IBM will, for example, ask a bank’s VP of engineering to look at the offerings from the startups it selected, largely presented in the shape of APIs that could work with that client’s portfolio. If the client approves the idea, then the relationship progresses to the review stage, which, according to Eck, is the toughest part of the process.
These reviews are very challenging. They have hundreds of steps to cover everything from technical due diligence to legal compliance, capital structure. Everything gets investigated.
Providing a seal of approval to speed up procurement sounds like a good idea in theory, but the practice is not that simple. According to Eck, IBM is still figuring out where it wants to land in the fintech validation process, as well as the intricacies of providing guarantees about the technology provided by the startup or its own structure as a company. A possibility could be to validate a certain number of key areas to reduce the weight of vendor review processes.
If fintechs have to go through five reviews with 500 steps each, it is going to collapse under the weight of the paperwork. So we are trying to streamline that - it is tricky, but our clients are telling us it has value. We might put a gold star next to the fintech’s name in the marketplace that says we’ve done some technical due diligence, but I don’t think that we want to accept all the liabilities of a third party. So that’s why I say it’s more like an advisory service where we do a bunch of the legwork, but the final decision needs to made by the bank.
Bright spots, bright lights
There are some bright spots in these interactions for fintechs who survive these grueling processes. Eck describes how IBM and a startup worked through to an offer.
We partnered with a fintech that does market news surveillance. This third party constantly looks at hundreds of thousands of websites, all the major wires and social media, looking for any news or trending sentiment about any of those companies that are being monitored. Once an event of importance is detected and an alert is issued, we then apply some of our Watson APIs for natural language processing to further understand the news articles or the social media postings that kind of triggered this alert, so that we can understand whether it’s a positive or negative story and the resulting impact. We can stress test a portfolio and simulate what the impact of an article, or a set of articles, will have on that company’s stock price. By applying some of our quantitative finance models, we can detect it and give a hypothesis of how this could affect positions that you have in that company in various portfolios, so that action can be taken if necessary, literally in minutes of a story breaking.
Within the context of capturing external innovation that may solve a user’s problem, IBM sees itself not only as a broker, but an enhancer of technology-enabled possibilities. Eck says:
The approach we take is that of a pyramid. At the bottom of it are all the APIs, including all of IBM’s Watson and financial services APIs, as well as the individual fintech APIs. And then one level up the pyramid, we start combining those APIs together in ways that produce a higher level asset that’s more valuable than the sum of its parts.
One challenge in doing that scouting work and then telling clients which innovations might be suitable to them is that banks are creating their own ecosystems and ways to interact with fintechs. This often happens when banks are solving local challenges; in which case IBM also wants to get involved.
According to Eck, the massive wave of interest in fintech by banks was not surprising to IBM, despite events such as the rapid rise of companies such as AliPay and WeChat and their impact in the payment industry in China or by larger challengers such as Amazon which also has an eye on differentiating payment solutions.
I think [banks] are really waking up now and really starting to take action. Some are really progressive and some that really haven’t started their journey. And then in the middle, we see a lot that have set up an innovation center, maybe they did some kind of an entrepreneurship program. But I think we really need to help things accelerate.
Challenges of the API economy
The biggest problem for banks in that scenario, says Eck, is banks’ inability to be in the API economy because of their largely monolithic architectures. But given that one of IBM’s main interests is digital transformation, wouldn’t the need by banks to restructure mean more business to the Big Blue? Eck certainly hopes so.
I think one of the real differentiators that we have against the other cloud providers and certain integrators, is our hybrid computing offering, especially if you think about micro-services and containers. We have multiple options. We’re running containers on premise in the data center, or we can provide a nomadic service off-prem. Obviously we have public cloud. So we have that full spectrum of hybrid capabilities that make micro-services very affordable.
This means that if a bank is too conservative to try a fintech offering, IBM will act as a facilitator of sorts by running controlled trials on-premise, then as the project progresses, move clients to the public cloud to generate cost efficiencies. Guiding these clients is necessary because banks are mostly confused about where to start.
We make it more possible for fintechs to do business with the banks, acting almost like an intermediary, we actually facilitate that happening, rather than being a challenge. Some of the banks really need that and have to start moving in terms of collaborative innovation. Many are paralyzed right now because that seems like an almost insurmountable task.
Eck’s advice to users looking to use an established vendor as an intermediary to engage with fintechs is to start small.
Pick a small use case that is important. One that you can define and that is achievable within a 3-month timeframe. It doesn’t have to be anything overly complicated or complex, but you need to take that small, but meaningful first step. There’s certain things that you can pick that you’d be more confident that you’re not going to interrupt banking services. That’s the approach that we’d take both internally in my group and that we propose with our clients: pick a problem, let’s go solve it, with a fintech maybe being part of the solution - or maybe not.
A figure that often floats around is that there are about 15,000 fintech ventures currently active worldwide. Even large, forward-thinking banks with scouting teams solely dedicated to finding a good match among all those ventures are only scratching the surface of discovering what's possible.
So what about getting their largest vendors, to whom banks are tied into long term contracts to do some of that legwork? That's attractive. But what if getting in under the radar of a firm like IBM is just as hard as going through 500-page procurement contract processes practiced by banks?
Bureaucracy and an inability to keep up with the pace of innovation are issues that wont go away anytime soon. That has to make life tough for fintechs eager to get noticed by large financial services players. But this disconnect is a good money maker for large traditional tech firms like IBM who can monetize “collaborative innovation.” And that's because they have something fintechs don’t: a good pedigree and relationships that stretch back over many years.