FS&I: The new order

The financial services ecosystem is transforming. While no organisation would deny the pressing need for digital transformation, I'm referring here to anther kind of change; the very structure of the financial services sector itself.

A new order is emerging. Fresh vigour is in evidence across the sector. It's a time of considerable opportunity for those who embrace the need for fundamental change. It could also be a time of diminishing opportunities for those who don't.

Organisations are beginning too cast  off previous values and perceptions about corporate behaviours and adopt flexible thinking which is open to ideas and influences once considered to be outside the 'establishment. Start-ups, not long ago considered 'upstarts' by traditional institutions, are here to stay.

A shift from competition to collaboration, from both incumbents and 'disruptors', is bringing a faster pace to digital transformation in a trend which will benefit not just the participants from both quarters, but also the customer. It's logical to assume that as the customer benefits, so does the business.

Collaboration with FinTechs: Quick win and lasting value

Observing the collaboration trend, PwC's Global FinTech Report 2017 suggests that  "82% [of financial institutions around the world] expect to increase partnerships with FinTech companies over the next three to five years". By partnering with innovators, incumbents will be able to  "outsource part of their R&D and bring solutions to market quickly".

While incumbents need the kind of fresh thinking, skill-sets and innovative products and services that FinTechs offer, there is a quid pro quo; FinTechs need  big numbers to survive. They need customers in volume, not just niche pockets of enthusiastic early adopters. Incumbents offer customers in their hundreds of thousands, and in their millions.

Consequently, incumbents hold a strong hand. They're in a position of being able to to leverage their superior scale and resource to assume a level of control within any  partnership. Barclays has adopted such an approach with its FinTech Accelerator programme, a partnership with Techstars . Start-ups are invited to compete for places on a 13-week programme in London, New York and Tel Aviv. The programme provides access to skills, resources, knowledge and investment, as well as introductions to potential customers within the Barclays ecosystem.

Approaches of this nature are a strategic way to build long-term capabilities in the FinTech space. More importantly, they offer incumbents quick and low-cost access to valuable skill-sets to help address their  own customers’ rapidly evolving expectations.

Collaboration beyond FinTechs: Innovative thinking for long term gains

Organisations beyond the financial sector are also realising the value of collaboration in new ways, with new partners, to exploit new business opportunities. Particularly active in this regard are e-retailers and social media platforms. They offer new channel opportunities for financial services organisations through their large customer databases, brand recognition and native understanding of digital business models.

Big Tech and professional services firms are also entering the market. For example, Accenture has created its own FinTech innovation lab with hubs in London, New York and Hong Kong.

The ground rules for successful collaboration

The main challenges are for both parties to align in four principal areas

Brand / Reputation / Risk
For FinTechs, association with a large financial institution brings immeasurable credibility, far quicker than it would take to build without such association. From the perspective of protecting the brand reputation, incumbents should seek reassurance in areas such as the FinTech's resource, scale and expertise to deliver on the deal. They should also undertake comprehensive risk assessments to ensure regulatory compliance.

Culture clash elimination
Corporate financial institutions are almost by definition conservative, process-oriented and wary of change. FinTechs are disruptive. Change is their raison d'etre. Both parties need to  take the time to educate the other about their business, their market and their customers. 

Market gaps / Customer needs / Innovation
FinTechs thrive on identifying under-served market segments and fulfilling very specific customer needs. Ironically the incumbent financial institution was doing the under-serving. The larger the service gap and the larger the under-served customer base, the greater the commercial opportunity. Incumbents therefore need to make an honest appraisal of  their weaknesses, and which of them would present the gateway to the greatest opportunity with a trusted and innovative partner on side.

Technology / Transtion / Integration
For traditional organisations, legacy systems restrain  innovation and agility.  As digital natives, FinTechs have no such shackles on their agility and growth potential.Their services are built on flexible, scalable platforms driving fast, efficient delivery. FinTechs think digital, which is precisely why banks are looking to partner with them. But for the partnership to work, there needs to be a meeting of  minds on how technologies will be deployed, integrated, developed, shared and funded.

Customers are universally expecting more from their banks and other financial services providers  as awareness of FinTech offerings grows and the services designed for the modern lifestyle gain greater adoption and  acceptance. Incumbent organisations need to refocus themselves to become more customer-centric than ever if they are to stay competitive in an increasingly FinTech-driven landscape.

Explore the negatives

As a final word; whilst collaboration with innovative partners seems an entirely appropriate and potentially winning strategy in a digital age, the practice comes with caveats.  Cyber security is a concern for banks entering into such partnerships, particularly as it pertains to the sharing of sensitive information. 

Some institutions are wary that using technology supplied by third parties could expose them to  legal, financial and reputational risk. Other considerations relate to culture differences between FinTechs and incumbents, and issues around intellectual property rights.