September 2, 2016
The next wave of payment FinTech innovation will undoubtedly come from FinTech-bank or digital ecosystem-bank collaborations. In most cases today, far from being rivals, banks and FinTechs need each other and should consider each other as potential partners, says Matthaeus Sielecki, Head of Working Capital Advisory – Financial Technology, Deutsche Bank.
In this age of radical digital transformation in the financial services market, and in the payments market, in particular, banks or financial service sector organizations on the one hand, and FinTechs or digital ecosystems on the other, must learn to co-operate. The reason is clear: in a highly regulated market such as financial services, neither type of organization can innovate and scale on its own.
There are many ways in which banks’ organization and culture inhibit innovation. All large organizations must work hard to maintain a culture open to change, but banks are additionally hampered by legacy infrastructures and having to ensure that every change conforms to regulation. Also, as custodians of customer money, they are constitutionally cautious. All said and done, it is easy to understand why banks do not always respond sufficiently swiftly to changing customer needs brought about by modern expectations.
FinTechs, on the other hand, can also find it hard to succeed on their own. They may have developed innovative solutions that are highly appealing to customers, yet may lack one or several of the other crucial ingredients required to translate this into a viable customer product or service or scale it up for success, whether processing infrastructure, global reach, regulatory expertise, or knowledge of how the customers of the financial service sector behave.
In contrast, by pooling both organizations’ resources, a bank-FinTech (or bank-digital ecosystem) alliance can align strengths, while addressing any shortcomings. Together, they can find the best ways of serving business customers in the digital age – by combining cutting-edge creativity with proven processes and infrastructure.
So what is in it for FinTechs and digital ecosystems? From their point of view, a bank’s expertise in regulatory and risk management is essential to initially enable new financial products and services, as well to make them viable over the long term.
The FinTech (though possibly not the large digital ecosystem) may also need the bank’s financing capabilities to bring its project to fruition. And in the development phase, both types of tech organization may benefit from the bank’s extensive knowledge of financial service customers’ habits and concerns – which may differ from those of retail customers or social media participants.
Finally, once the product is ready to roll out, the banking partner’s worldwide reach and tried-and-tested processing infrastructure will ensure that the new product or service has the best possible chance of going global, and of staying in the market for the long term.
Of course, a large digital ecosystem – in contrast to a specialist FinTech – may be able to supply some of these factors itself, such as the financial resources and global reach. But there is more than sufficient complementarity to make an alliance with a bank or other type of financial services institution richly rewarding.
In addition, there may be a further incentive for both types of organization to co-operate – something even more powerful, albeit a lot less tangible. When an entire industry undergoes transformational change, as is currently happening in financial services, it is not just products and services that change. Mindsets, shared concepts and approaches, business models and entire paradigms tend to shift as well.
To be at the forefront of innovation in such a market demands the highest level of transformative thinking. What is sometimes required is actually a quantum leap, changing the entire way a service is configured and offered, not just the technology through which it is delivered. Think of the way Uber disrupted the market for taxi services, or Airbnb the market for hotel rooms – they both used an entirely new approach and business model that altered the mindset of an entire industry.
In the same way, radically new and transformatively intuitive ways to deliver banking services to the CFOs and corporate treasurers of the future – still in development – are likely to involve far more than simply adding a new application here or a smart device there. What better way to try and find such ground-breaking new solutions than letting the weight of a bank’s customer-centric legacy and knowledge collide with a FinTech’s novel approach and out-of-the-box thinking? Where else shall we seek paradigm shift if not here?
So what should a FinTech or a digital ecosystem wishing to find a bank or financial services sector partner look for? The most important qualities in a strategic financial services partner are a real commitment to digital change, and the willingness to collaborate for the long term. If a bank partner were to withdraw prematurely from a joint project, obliging the tech partner to seek a new alliance, this could set the project back significantly, causing it to lose its innovatory edge.
Once partners have been identified, they should consider early on whether they wish their partnership to be exclusive or whether further partners may join, and what sort of structure their relationship should have. Indeed, there are many forms it could take – for example, from the partners working on a joint product that they market under both their brands to the bank white-labeling a product developed by its tech partner behind the scenes. In any event, a partnership should be strategic and one of equals, in terms of commitment, intellectual contribution and mutual respect.
At this stage of development of the financial services market, there is an overriding need for innovation, and those who wish to command the floor in future would do well to grab their partners now for the dance that has already begun.