There’s been a lot of talk about collaboration as the key to success for banks and fintech firms. A recent techUK paper discussed in great depth how collaboration is key to delivering new services in an open future. As consumers and businesses can pick and choose who they share their data with, the traditional notion of competition will be tempered through collaboration that creates an ecosystem within which all market participants benefit.
Banks could go it alone and attempt to radically alter their approaches by augmenting their data sources, refreshing supporting technologies and expanding analytics capabilities in-house. This could take the form of buying neobanks or creating joint ventures within the ecosystem, but it offers no guarantee of success and comes at significant financial risk.
On the surface, increased collaboration makes a great deal of sense for both parties. But partnering and collaborating for the sake of it – like most relationships formed on reality TV, may generate plenty of headlines and short-term interest – is ultimately doomed to fail. Simply, there’s not enough substance to the relationship to make it sustainable, and it’s rarely ever equitable. For banks, it won’t create the step change they need to deliver the next generation of banking services. The fintech firms, especially those that are smaller, don’t have the capacity to chase multiple bank opportunities, only to find that the bank was essentially window shopping for cute ideas to pop into their accelerator – and onto social media.
In conversation with numerous fintech firms recently, it became pretty clear what they’re really looking for in an ideal bank partner:An innovation mindset. This doesn’t mean the bank has to be seen to be “the most innovative”. However, you might attempt to quantify that, rather they are proactively working on new ideas and services and don’t box innovation into being an app (don’t laugh, I’ve seen this again and again). After all, if you’re a fintech with a new idea, you really want to find likeminded people who will listen to – and be interested in – what you’re thinking. A track record. Getting a foot in the bank is all well and good, but then what? Fintech firms also want to see a demonstrable, successful track record of working with startups, even if every project didn’t succeed. For banks, this means seriously rethinking your partnering processes and having a viable and documented approach to collaborating with third parties. (Note: This goes far beyond box ticking marriages-of-convenience.) A change mandate. Bad news, Converse-and denim-wearing innovation lab people: you’re not much use here. And that’s not your fault, but simply put, you’re in a neat little box but not really influencing the bank at large. This doesn’t help the fintech firm, as they instantly become the curio tucked away in the department no one listens to and happily ignores. Unless there’s a real mandate to change the bank, a fintech firm will be set up to fail by collaborating with you. A cast of two – not thousands. Banks have lots of people, and early-stage fintechs have few. All they want (and can handle) is two counterparties in the bank: one commercial person and one technical person. It’s down to these two people to navigate the bank. A fast and agile IT department. Banks may have large IT departments, but they also tend to be siloed and focused on keeping the lights on. How does a fintech firm fit in to this model? How open is the IT team to experimenting with new ideas and failing fast? Many simply aren’t set up to think or act this way, and this is problematic for the fintech partner firm. Empathic approach. Banks need to stop thinking of fintech as code for ‘startup’. Leda Glyptis has a great perspective on this. It’s not about a type of firm, or a selection of certain technologies. It’s a mindset focused on making financial services more accessible, simpler and focused on the services bit of financial services. No more big, dumb, mass market products. This switch to services requires a focus on interrogating multiple sets of data as sources of insight to uncover customers’ underserved and unmet needs, delivered through personalised and empathetic communication.
As we move towards the open future, we will see a number of approaches emerge – from the head-in -the-sand banks believing they have all the trust and scale to win, all the way through to those who are active and positive participants in the new ecosystem that’s emerging. The middle ground is a hybrid, where the bank focuses on its core business and collaborates with a range of third-party providers to deliver new services.
If the notion of the connected ecosystem isn’t embraced by the banks, the danger is that the technology platforms move in and end up dominating the market, relegating them to the behind-the-scenes rails.
This isn’t reality TV, where the fallout of failure is limited to just a few months, or until the next series of willing volunteers comes along. The long-term risk was called out by the Bank of England in its 2017 stress tests, where the results suggest the competitive pressures from fintech could lead, conservatively, to a reduction of £1.1bn in banks’ aggregate profits by the end of 2023. Specifically, the BoE said:
First, competitive pressures enabled by fintech, and in particular the emergence of Open Banking, may cause greater and faster disruption to banks’ business models than banks project. Second, banks are projecting large reductions in costs and there is a risk that they will be unable to execute these plans fully while delivering a broad range of services, particularly given that the cost of maintaining and acquiring customers may be higher in the scenario.
So, what to do? It requires banks to become more attractive to fintech firms, both the niche players and the tech titans who are already innovating around the service delivery layer. If we can have an open and honest discussion on collaboration and how that works, the potential benefits for consumers, business and the wider economy are immense. We would create a model where there is genuine consumer choice, and competition is enhanced, where fintech firms with a great idea can, through collaboration, bring innovative services to market at scale.
If the banks don’t want to actively, positively and meaningfully participate in this ecosystem of services, it is entirely their call. But as the BoE warned, they may end up becoming a high-cost utility, or worse, nothing at all.
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