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  A 30–40 man FinTech operation shouldn’t be spending months or tens of thousands on legal paperwork so some internal stakeholder at an incumbent bank gets to cover their derrière. That is an insanely bad use of FinTech resources. Simpler contracts and more checkpoints are critical.

  Also keep in mind that in many cases when a FinTech comes to you with their technology stack, it will likely be in the cloud. What that means is that cybersecurity, uptime performance, data storage and residency, will all be the domain of the cloud partner. Ensure that you don’t simply pass on legal work to a FinTech requiring them to act as an intermediary with, say, Amazon Web Services on your behalf.

  Technology chasm

  Of course, there’s going to be a technology gap—that’s why you are collaborating with the FinTech in the first place. Make sure that there are clear expectations about how this gap will be filled. Does the FinTech have an API-ready solution? Are you required to build to their API, or will the FinTech have to modify or extend their API to integrate with the bank’s existing IT stack? Is work needed to prepare for the partnership just so your internal bank team can meet the data provisioning and formats requirements of the FinTech? We had a major bank out of Europe opt-out of a strategic investment in Moven because their team said our technology stack was too different from their own—instead it could have been an opportunity to observe and learn.

  FinTechs often have more up-to-date technology knowledge around the core components they’re using. Bank IT departments are not used to being behind their IT service providers on technology—normally, it is more of a licensing process than a technology learning curve. Expect that in a collaboration your internal team may be learning from the FinTech, and the learning curve may be steep. Finding a CTO or internal project manager that isn’t precious about the technology stack the bank has already built is going to be a challenge—especially when it comes to stuff like the cloud, blockchain and AI, where banks are clearly playing catch up.

  Both teams need to strongly focus on outcomes.

  Too short-term ROI focused

  One of the cultural reasons FinTechs and banks clash is that a FinTech has likely grown up with venture capital funding designed to give the startup some time to develop and test their product in market. Profitability is not a strong consideration, even for mature FinTechs like Ant Financial—the focus is predominantly on growth. For bank technology projects, however, ROI (Return on Investment) horizons tend to be fairly short—maybe even a 18–24 month payback. This is going to be a source of contention.

  In the medium-term, much of the capabilities FinTechs are deploying right now don’t have a clear path to profitability, but are essential to being able to provide differentiated financial services experiences on the technology layer. Short-term ROI focus to underwrite an internal business case could very well derail collaboration efforts before they start. This doesn’t mean banks have to just write off large investments in new technologies. It does mean, however, that ROI might need to be measured by different key metrics that are softer than the typical IT project. These metrics might include brand equity from association with the FinTech, acquisition of new skills on an emerging platform, out-of-the-box thinking capabilities, or the ability to experiment with a new technology to establish feasibility.

  Regulatory soundness

  A FinTech comes to you and has a cloud-based AI service that will allow you to do contextual recommendations and cross-sell offers via voice and mobile, with real-time fulfilment for onboarding. What do you do? Technically this ticks all the right innovation boxes, but depending on which country you are in, and which central bank regulator you are licensed by, this FinTech may be in breach of a range of current regulations. You may not be able to deploy in the cloud, data residency might be an issue, and the regulator may still require a wet signature for a customer accepting a credit offer from your bank. This needs to be factored into the partnership.

  However, regulatory compliance may not be the flashing stop sign it used to be for banks. Increasingly, FinTechs are getting adept at working with central banks and regulators to prototype new technology approaches that circumvent current regulations. Regulators are even setting up regulatory sandboxes to test these new offerings, or issuing waivers to existing regs.

  Make sure that before you kill the partnership with the FinTech, or assume you can’t proceed, that you at least give the regulator the option of allowing you to prototype this new technology in the field and see how customers respond to it. Maybe ask the regulator to allow you to release the technology on a limited basis to 10,000 customers initially, to assess the risk to those customers.

  This does require a different compliance approach from the incumbent. In the past the compliance team acted as gatekeepers, preventing the bank from doing projects like this because they would put the bank in breach. But FinTechs don’t work like that. FinTechs will knock on the front door of a regulator, explain that other countries already allow them to implement their technology in their markets and that the technology has resulted in higher levels of customer satisfaction and lower incidents of fraud, and that this might be a justification for allowing a trial of that technology in your home market. This approach is part of the culture shift that incumbents are increasingly having to grapple with. The answer is no longer, “No, the regulator won’t allow that.” It’s not “Let’s talk to the regulator.”

  If you can’t beat them, join them

  Clearly the atmosphere is changing when it comes to bank collaboration with FinTechs. A few years ago, both FinTechs and banks were talking about the competitive landscape and “who was going to win” the fight. Today, there are ever more announcements of collaborative efforts. Certainly when it comes to technologies like the blockchain, partnerships are the norm, not the exception.

  The smarter incumbents are now recognizing that a “not made here” philosophy is unlikely to serve them well in the fast-moving and diverse ecosystem of FinTech innovation. Instead, they are shopping around for partnerships with the most innovative FinTechs. Events like Money 20/20, Finovate, Fintech Stage and Next Money are increasingly becoming platforms for this type of speed dating service between FinTechs and incumbent banks. But once a potential courtship is deemed possible, that’s when the real work begins.

  Figure 10: Collaborative vs competitive FinTech investments by region ($M) (Source: Accenture analysis of CB Insights data).

  Banks must do a lot of work just to make collaboration efforts viable. It starts with a culture change in the bank, but it includes the fact that even the budgeting process and allocation of funds is going through a sea change. In 2016 banks invested around $5 billion into FinTech deals and collaboration, but $50 billion internally on their own systems and innovation projects19. If you want to be a digital-first organisation, that ratio is definitely going to have to change.

  Lastly, strategy is going to be key. If you’re a bank making $1 billion a year in net margins, when is the right time to start cannibalizing your branch business in favour of a digital-first onboarding process? Organisationally, what is the impact of that? Partnering with a FinTech is going to deliver you capabilities that are quite possibly in direct opposition to your current lines of business in respect to distribution and fulfilment. And yet, if you don’t act, you know there is another bank and a dozen FinTechs already deploying that technology in the market. Damned if you do, damned if you don’t.

  The reality is that whatever your strategy, it’s pretty clear that agile, creative thinking is going to be essential in staying ahead of the digital curve when it comes to the evolution of financial services. In that case, your best bet is to work with the disruptive end of the market, rather than try to compete. Your best bet is to experiment with new technologies using a skilled, fresh set of eyes, than to try to reinvent the wheel internally when you know it will simply cost you more money and more time than through a partnership.

  Yes, the time is now for collaboration and partnership betw
een these two worlds. The benefits certainly outweigh the risks.

  Endnotes

  1Source: KPMG Pulse of FinTech Report (2018).

  2Source: Market Insider, Business Insider.

  3Source: Bloomberg/Mercury News—“Venture Capital hits $84 billion, highest since dot com boom”, 11 Jan 2018.

  4I recognize as a FinTech founder that I may be biased in my view of where FinTech fits in the future of financial services.

  5I’m talking to you Zelle®, HSBC PayMe®, etc.

  6Think Metcalf’s Law, Gilder’s Law and technology adoption diffusion rolled into one inexorable wave of consumer adoption of new technologies, social media and messaging platforms.

  7Sorry, the UK’s Metro Bank doesn’t really count.

  8Source: British Bankers Association survey 2016.

  9Source: Mitek Scorecard—UK bank accounts: a survey of true digital capabilities in customer on-boarding (December 2017).

  10Source: The Digital Banking Report, 10 July 2017.

  11Source: KPMG Report: “A new landscape—Challenger banking annual results” (2016).

  12At the time of writing, the OCC FinTech charter lies legally tied up in Trump administration and various state banking commission challenges.

  13Source: EY’s FinTech Adoption Index 2017.

  14Source: McKinsey—“FinTech: Challenges and Opportunities”, 2016.

  15See “The Future Of FinTech And Banking: Digitally Disrupted Or Reimagined?” Report from Accenture.

  16Source: Various—McKinsey, EY, The Financial Brand, Celent, Forrester Research.

  17Full disclosure—I sit on the board of CFSI.

  18Source: Mayer Brown—“The ABC of FinTech Survey”, November 2016; a survey of 70 financial institutions in the UK.

  19“IT Spending in Banking, A Global Perspective”, Celent, February 2015; “Digital Disruption: How FinTech is Forcing Banking to a Tipping Point”, Citi, March 2016.

  We are still in the early stages of how the FinTech industry will impact the financial sector, regardless of any hype that might suggest otherwise. FinTech startups and tech giants will change the banking industry in ways that we could never have imagined, especially when we look back in just 10 years’ time. A FinTech tsunami is heading towards the financial industry’s shore, so banks should diligently prepare for the vast and disruptive changes to come. Most banks have historically been resistant to this message, but it is happening regardless. The reality is that most incumbents that aren’t in the top 100 global banks are already years behind the average FinTech in their specific domain.

  We’ve all heard the frog parable that basically says that a frog that is put in a pot of boiling water will jump right out of it. However, if the frog is placed in the pot with a comfortable water temperature and then the water is heated up slowly to boil, it will not realise the danger of likely death until it is too late. Although science does not corroborate the so-called “frog experiment”, it serves as an excellent metaphor for the risk that organisations face by not adapting to the new environment created by technology-led banking experiences.

  Future scenario-planning is a core skill for incumbent banks in particular. They should ask themselves: are the changes we’re seeing in the experience layer and core building blocks of financial services led by FinTechs the boiling water in this metaphor? Or are there incumbents smart enough to realise the danger and act accordingly—in this case, adapting to the new standards in day-to-day banking created by FinTech startups?

  The broader evidence suggests that while we have seen some banks taking steps towards capitalising on what the FinTech startups or technology leaders have to offer, such as cutting-edge technology implementation, innovative solutions and an excellent user experience, not enough are taking the threat seriously. The typical posture of the industry at large has been to see FinTechs as competitive threats. That is a pity, because I believe the FinTech industry can significantly assist incumbents in addressing their legacy systems limitations and, more importantly, their legacy thinking.

  One positive effect coming from the FinTech wave is that it is certainly now easier for those inside a bank organisation who want technology to be as cutting-edge as possible to get attention from senior management. Slowly but surely, the injection of innovations from the FinTech space has given way to top bank management feeling the urgency to stay competitive. These examples are becoming more common daily: such as Wells Fargo’s Greenhouse, Chase’s Finn and Emirates NBD’s Liv apps in response to the likes of Moven and Monzo; or HSBC’s PayMe P2P app and EasyPay in Hong Kong as a response to WeChat and Alipay’s dominance there. There is also Schwab, Fidelity and Vanguard’s own robo-advisor efforts in response to Betterment, Wealthfront and Personal Capital. In most cases, though, incumbents still lag three-to-four years behind the innovations created by leading FinTechs; and even after they launch, these same FinTechs remain ahead in terms of design innovations, features and thinking. The water is still boiling.

  It makes sense, then, that partnerships between banks and FinTechs should be far more common today than they are. Some incumbents have experimented with the opportunities FinTech partnerships can offer them, but statistically this is true only for a handful of banks globally. Is this a question of trying to figure out how to work with each other as partners, given both bring different strengths and advantages to such a partnership?

  FinTech companies usually have a faster and cheaper innovation process and are extremely customer-focused, qualities that are out of reach of probably all banks today. On the other side, the advantages banks bring to a possible partnership, such as revenue (for the FinTech), customers (scale) and brand are also extremely compelling. That is why I believe we are about to see a wave of collaboration between FinTechs and banks that will accelerate industry change. For those banks still resistant to such opportunities, they are going to find themselves falling further behind the changes in the industry.

  One of the primary reasons the banking industry is being forced to adapt to this new world is plainly that customers are increasingly comparing offerings by banks to what FinTech startups or tech giants have to offer. It starts with simple things like: why can’t I open my account through your app instead of a branch? Why does your app look so dated compared with these challenger banks? And why hasn’t your internet banking design changed in a decade? It is clearly reminiscent of how Apple set the standard for design, user experience and innovation for all their competitors by focusing on delighting the customer. In the same way, FinTech startups have successfully redefined what the customer demands from a bank. FinTechs have set the bar for the user interface much higher than incumbent banks.

  The solution is patently obvious. The smartest banks will increasingly see that FinTech startups should serve as virtual innovation hubs, which they can take advantage of by partnering with or acquiring some of them. Accelerator, incubation, innovation and hackathon initiatives by banks simply do not provide the desired effect of becoming more innovative, often because the culture of the bank does not allow innovative ideas to be adopted at the same rate as with a FinTech. However, these programmes can be used to gain insight into FinTech offerings, and better judge the right FinTechs to partner with or acquire.

  Due to their operational complexity, compliance constraints, legacy systems and thinking and just the organisation’s sheer size, incumbents are by nature slow to adapt. Another reason for banks moving slowly might be the assumption that their older customers with money do not care about the difference, for instance, between a cutting-edge banking experience and the current state of the bank’s technology. That would be a flawed and dangerous assumption, because we clearly see older people use cutting-edge technology like iPads or smartphones in their daily life. Regardless of age, demand for cutting-edge banking technology, reduced friction in financial services and best-in-class user experience will be a bar set by the success of FinTech players.

  When you are delivering hundreds of millions of dolla
rs or more in net margin each year, it is understandable why banks are hesitant to cannibalise their business model by more aggressively applying FinTech operationally, and that they would rather see it done slowly by the startups and act as a so-called fast follower when it succeeds. Statistically this lag is resulting in gradual (and sometimes dramatic) shifts in market share1. Thus, the better decision may be for the banks to cannibalise their own business, staying in control of the process and their destiny. In contrast to the startups, banks have the brand, customers and money to feed new business units, and therefore to increase the likelihood of success.

  However, at the same time, banks need to address and manage the fundamental disadvantages they carry of lack of execution speed and focus. Ultimately, it still comes back to the fact that if you want fast, cheap innovation within your bank, you should be looking to change the culture internally to leverage more effectively off technology partnerships.

  Whether your bank ends up as the frog in this scenario is to a large extent in the hands of its leadership. For many incumbents the frog metaphor will play out in the worst way possible because they failed to see an industry being reshaped by emerging players, imagining that there was enough momentum in their old business model to ride it out. Their smarter competitors will jump out of the hot water to aggressively pursue partnerships with the FinTech agitators and technology innovators, recognizing the boiling water as one of the greatest opportunities the financial industry has experienced in the last 700 years. Do you want to be the frog or the boiling water? Be the water, my friend…