New article series from the SWIFT Institute and Knowledge@Wharton explores the fledgling relationship between banks and fintechs
This article is a continuation of Banks and fintechs: adversaries or partners? and was produced in collaboration with Knowledge@Wharton.
Banking on Tech
Traditionally, financial institutions have been more processoriented. This, along with legacy systems and regulatory framework, has restricted their ability to quickly leverage new technologies and roll out new products and services which address customer pain points. Fintechs, on the other hand, are typically more customeroriented (rather than processoriented), asset light, have lean operating models, are free of legacy system issues and have better regulatory arbitrage. This allows them to nimbly leverage new technologies like cloud and artificial intelligence to offer a highly differentiated customer experience centered on personalization, speed, relevance, and seamless delivery.
When banks and fintechs collaborate, innovation and speedtomarket foster a better customer experience like never before.
Vijay Shekhar Sharma, founder and CEO of India’s Paytm, says what sets fintech’s apart is the way they approach a problem and their ability to continuously evolve. Banks and fintechs, he points out, are essentially trying to solve the same problems. But unlike banks which use “ageold wisdom,” fintechs are “resetting business models by experimenting with newer opportunities.” In Sharma’s view, it is not fintech companies that pose a threat to banks: “If banks don’t adapt to the new world where consumer behavior is tilting toward technologyled banking, technology could become a threat.”
Sharma points to another major difference: Unlike banks, fintechs have access to risk capital and are not under continuous pressure to be profitable. Fintechs, therefore, can experiment while traditional banks mostly experiment with what has always worked. “By then, the product moves many notches ahead in the market. It’s a classic problem, where fintechs produce technology, and banks, that typically use outsourced IT service providers, can only be customers of technology.”
PwC’s Belgavi notes that fintechs initially focused primarily on disrupting customerfacing areas. They introduced innovations like chatbots to respond to customer queries, authenticated users in near realtime, enabled frictionless, contactless and seamless transactions and offered deeply customized financial products. Financial inclusion of unserved and underserved segments by assessing unconventional data sources and behavioral characteristics, such as willingness to pay, has also been a focus.
Now, fintechs are also developing solutions for noncustomer facing areas. For example, they are trying to combine capabilities of AI and robotics to develop newage solutions for fast processing. Regtech — assisting firms in next generation knowyourcustomer (KYC), compliance and regulatory reporting — is also gaining traction. “Fintechs are trying to disrupt the entire financial value chain through innovative offerings,” says Belgavi. “Newage banks such as Openbank, Monese, Monzo and Fidor — with new age models and differentiating solutions — are seriously challenging the business of traditional banks.”
According to Capgemini’s Krishnan, fintechs can take market share from banks “very quickly and often times without any signals to the big banks that they are losing market share.” He cites examples like PayPal, TransferWise, SoFi, Better Mortgage, Stripe, Square and Ant Financials. Paypal (digital payments firm) has over $450 billon of annual payments. Square, founded in 2009, crossed $2.2 billion of revenue in 2017. Ant Financial has a valuation of over $100 billion — about the same as Goldman Sachs.
Trying to Keep Pace
Banks are trying to stay relevant in this fastchanging landscape through different initiatives. For instance, they are setting up their own centers of excellence and developing inhouse solutions, introducing chatbots and voicebots, offering online banking and mobile banking, and launching their own cloudbased digital offerings.
There are also instances where banks have tried to digitize the existing broken, manual processes rather than reimagining them. A few have tried to develop new technology stacks over the existing technology ecosystem. But such an approach doesn’t help in fundamentally transforming customer experience. To remain relevant, banks need to think beyond the obvious and reimagine their offerings with customers at the center, says Belgavi.
This is where collaboration with fintechs, which are highly customercentric, is expected to bring gains. “When banks and fintechs collaborate, innovation and speedtomarket foster a better customer experience like never before. Banks don’t have to reinvent the wheel as they are able to take successful fintech models and apply them to their customers and their environment,” adds Krishnan.
Will regulations prove to be a challenge? ABA’s Morgan points out that the regulatory framework was written in an analog era and digital technologies are challenging some of the assumptions that those regulations were written under. In the U.S. for example, there are a number of states where taking a picture of a driving license is not legal. “It’s hard to do things like opening a bank account on a mobile phone when you can’t take a picture of the driving license,” he says. But regulators are trying to adapt.
Changes are already taking place. Europe has recently introduced two ground breaking regulations that could redefine consumer finance – the Open Banking Initiative and the revised Payment Services Directive (PSD2). These make it mandatory for banks to share their customer data with third parties provided the customers give their consent.
Partnerships should not be just for branding, but must significantly transform the nature of offerings.
In a Knowledge@Wharton article discussing the impact of these regulations, Pinar Ozcan, professor of strategy at the University of Warwick in England, says banks could benefit from this. Companies that have the largest customer base are in the best position to turn their businesses around and make it a platform. Ozcan further notes that if banks were able to act fast and get these fintechs on board to provide a platform or build a platform to offer better services to the customers, they “wouldn’t need to go anywhere else.”
The Right Moves
Some banks have been quick to see it. Spain’s BBVA made eight of its APIs commercially available through the BBVA API Market in May 2017. This allows startups and developers to build new products and services by accessing and integrating the banking data of BBVA’s customers – with their permission – into their applications. Derek White, global head of customer solutions at BBVA, said in a statement that “by opening commercially our data and services, BBVA is turning ‘open banking’ – a model that is going to speed up the transformation of the financial industry – into a reality. Not only are we adapting to EU standard PSD2, which aims to boost competition in the industry, but are actually aiming to become the best platform on which to build new digital experiences. This is a customerled business opportunity.”
At present, popular engagement models include innovation labs where cuttingedge products are built within the bank, accelerator programs and venture investments. Practically all large banks have embarked on these.
Take India’s Kotak Mahindra Bank. It started its fintech partnership program 18 months ago to look at fintech solutions from top to bottom. The Kotak team identifies the bank’s business problems and then looks out for fintechs that can solve them. It also looks at available solutions from fintechs to see if they could work for the bank. Notes Deepak Sharma, the bank’s chief digital officer: Partnering with fintechs allows multiple tests simultaneously. The bank learns fast “whether we should scale a particular offering or pivot to something else.”
Sharma’s team has three engagement models with fintechs. One, it takes their ready solutions and deploys them internally. Under this model, the bank has partnered with fintechs like AI firm Active.ai (for conversational banking), CreditVidya (lending solutions) and RupeePower (real time credit decision). Second, it partners with fintechs that are in the customerfacing businesses like Payso and Ftcash (payment and lending options to small businesses and neighborhood stores) and powers them with its APIs to help acquire more customers. And lastly, it recently launched a payments co creation program under which it has partnered with six fintechs in the payments space. These include Automaxis (solutions for goods and services tax filings), DairyPlus (payment digitalization for dairy distribution businesses) and Nukkad Shops Technology (retail business solutions for mom and pop stores).
These fintechs were selected from 133 applicants. They get to work with Kotak’s innovation lab in Bangalore, receive mentorship and the opportunity for a pilot launch in a live environment. Over the past 18 months Kotak Mahindra Bank has partnered with over 55 fintechs through these different models of engagement. “The nature of our partnership with a fintech depends on their core strengths and which part of the value chain of financial services they are impacting,” says Sharma.
Many financial institutions including Citibank, Barclays, Goldman Sachs and Nomura have accelerator programs for fintechs, while UBS, Deutsche Bank, Societe Generale, BNP Paribas and HSBC have invested into fintech firms offering solutions across blockchain, data analytics, personal finance, wealth management, lending, payments, and settlement and regulatory technology.
According to the World Fintech Report, the fintechs’ most preferred partnership is in whitelabeling their solutions. Here, the financial services firm buys a ready solution from a fintech and implements it under its own brand. For instance, the partnership between JPMorgan Chase and online lending company OnDeck Capital combines the lending experience of JPMorgan and On Deck Capital’s technology platform to accelerate loan processing time. For the customer, the loans are provided through JPMorgan Chase.
The next preferred collaboration model is integrated inhouse solutions. Here, the products and solutions are hosted inhouse — typically for larger firms — or as a softwareasaservice for smaller firms. For example, ABN Amro has collaborated with Swedish fintech startup Tink to build an application that gives customers greater control over their finances. The bank launched its pilot version to 10,000 clients and solicited feedback to refine the app for the final rollout. Currently, more than 150,000 clients use the application Grip, which is linked to ABN Amro’s mobile banking application.
Those are the most preferred models of collaboration by fintechs, says Capgemini’s Krishnan. But over time, he expects a shift to full outsourcing and fintechs leveraging APIs, among others. To gauge the success of a collaboration, he says, it is important to ask the following questions: Does it solve a specific problem? Does it improve the cost or risk dynamics for both the partners? Does it improve the culture and foster new thinking and approaches? Did the collaboration achieve superior results vs. build from a gotomarket perspective? “Successful collaborations always achieve better results,” Krishnan adds.
Vergne says banks need to learn to become nimble, learn how to bridge siloes and increase their speedtomarket. Startups must learn to collaborate within highly bureaucratized structures and navigate complex hierarchies.
ABA’s Morgan believes that closing that culture gap is the big challenge. The culture profile of startups is to fail fast. Success after a 1,000 failures is still a success. In banks, the culture is built around managing risks. “Fintechs must understand the regulatory challenges and the need to maintain customer trust, while banks need to adapt to the innovative and iterative culture.”
For Belgavi, the key to a successful partnership is to find a middle ground that transcends differences across various aspects such as culture, project lifecycle and methodology, employee age and background, hierarchical levels and compliance requirements as they seek to develop a “sustainable and mutually beneficial” partnership. Most importantly, he says, “Partnerships should not be just for branding, but must significantly transform the nature of offerings.”
by Knowledge@Wharton, SWIFT Institute
Missed part one of Banks and fintechs: Adversaries or partners?, click here to read more.