March 7, 2016
Banks are exhibiting a willingness to transform themselves by working with the FinTech ecosystem. They have adopted different ways to work with the new global FinTech (ecosystem) and those initiatives largely fall into two buckets: internal programs and open innovation initiatives. There are various formats and ways of working with startups but it is very important to first understand why banks are doing it. What is the bigger objective? Is it only achieved by doing (in a rush) what a few others are doing or is there a more important reason and a more meaningful exercise (a pre-step) that leads to that?
Let's address some of those questions. In order to integrate a startup product into your offerings as a bank, you need to have a very well-defined and robust process internally. While working with banks, we understood that the following is the flow:
1. Why do we need to innovate? (impact of digital, smartphones, millennials, data opportunity, messaging, on-demand, real-time)
2. What should be changed or replaced in our current service offering to serve customers better?
3. In order to do #2, do we have the talent and internal know-how?
4. What will be the time to market vis-à-vis the competition if we do #3. What are the areas that need external support?
5. Should we work with IT vendors and large product companies for that?
6. What are the costs and timelines involved?
7. Are there areas where we need to make changes fast to respond to market needs?
8. Can we work with new FinTech companies for that? What are the pros and cons considering all the above questions?
9. What are the areas and FinTech startups we need to focus on? How do we engage with them?
10. How do we prepare our management and our engineering team to embrace this change?
Let's look at some current affairs. In 2015, Wells Fargo had selected three early-stage companies – Gridspace, Roostify and Splice Machine – for investments of up to $500,000 for Wells Fargo Startup Accelerator, a semiannual boot camp for innovators who are looking to shape the future of financial services. Banks have also put incubator programs in place which have created some innovative FinTech companies which have helped banks to explore the latest technologies and to understand the best solutions that work in the market. For example, the winners of BBVA’s OpenTalent Europe contest, Ever Ledger and Origin Markets, are working on solutions such as blockchain to fight against fraud and a marketplace for corporate bond issuance, which are areas of top priority or of high interest for banks. BBVA Compass has also partnered with FutureAdvisor to offer robo- advisor services to its customers.
Bank of America holds an innovation summit that draws 200 to 300 technology companies every year, with almost 17% of startups succeeding in having a relationship with Bank of America. At the summit, FinTech entrepreneurs spend about 45 minutes pitching Bank of America on their products and services, with the bank's employees making an immediate decision on whether to work further with the startup. We are also seeing that Bank of America’s rivals are equally keen to work with FinTech startups. JPMorgan Chase recently said that it will team up with OnDeck Capital to finance small businesses. Banks are also opening up their APIs for FinTech Companies to innovate quickly.
Not every bank is at the same stage. We had discussions with many banks in the last one year; some banks that we talked to are still evaluating how to work with startups. They have done some work but are not at a stage where they can run an accelerator of their own because they don't know what would they do with the selected startups and how to integrate them into their products/services. A lot of it has to also do with the lack of talent to run such programs and the culture (especially in emerging economies).
Looking at all of these interesting developments around how banks and FinTech Companies are working together, LTP has come up with an Innovation Readiness Index for banks. It is based on a careful study of 50+ banks across the globe where we talked to teams, looked at their current activities and their future plans. Following is a very high level example of external innovation mapping of a bank from outside.