When worlds collide: fintechs vs financial institutions

Sibos 2016: fintechs vs financial institutions

The opportunity for traditional banking processes to be transformed that is presented by innovative financial technology (fintech) developers is at risk of being squandered in many cases because of cultural differences between large inflexible enterprise culture and the enthusiastic approach of the start-up developer world.

“Fintech is a nonsense term – and I don’t mean to be dismissive of a lot of people’s hard work – but it is being used in a way that is becoming mercurial and is starting to infantilise the conversation,” said Leda Glyptis, a director at Sapient focusing on digital transformation. “It starts becoming a philosophical conversation and that’s not an easy conversation to have in a boardroom.”

The ‘threat’ fintechs pose to banks is exaggerated, said Steve Lemon, co-founder of cross-border payments as a service company Currencycloud. “Fintechs are not a direct threat to banks,” he said. “Bank A is not threatened by a fintech, but it is threatened by bank B plus a fintech.”

For incumbent institutions, harnessing fintech will mean a change in culture as much as in the way technology is deployed, said Kevin Hanley, head of RBS’s digital design team. “Fintechs and banks have completely different skills: fintechs find it hard to establish scale and banks find it hard to think openly. We don’t want to be a fintech, but we have to recognise that we need to partner with, invest in and compete with them. The disaggregation of parts of the financial value chain means we have to ask how we can combine our assets with those of others, including other banks.”

It has been clear that the disaggregation, or componentisation, of elements of the value chain, where some functions are effectively outsourced to a partner organisation, is likely to lead to some fundamental changes in the way banking operates. Regulation such as the Payment Services Directive II (PSD II) will accelerate this process, said Matt Cox, head of insight and innovation at Nationwide Building Society in the UK.

“PSD II will be a game changer and banks will potentially retreat from the customer facing side, which will become the fintechs’ expertise,” he said. “It changes the role of the branch and the role of technology is to give customers a choice in the way they interact with the bank.”

Banks themselves will continue to innovate, he said, citing the possibility opened up by technology to transform mass market current accounts into “digital concierge services”.

Hanley agreed: “We are exploring how opening our APIs can lead to third parties developing services for our customers.” RBS meets around 1500 fintechs and technology providers each year. “We spend a lot of time thinking about how we interact with people in adjacent industries such as Apple and Google.”

Christophe Chazot, group head of innovation at HSBC, said banks have to focus on what they are good at in terms of providing services that customers need to solve their problems. “The problem for corporates isn’t connectivity, it’s connectivity to liquidity, a problem for which banks have been providing solutions for some time.” Banks were dealing with the 2008 crisis and fell behind, but that has now changed, he added, and banks are catching up; 50 per cent of HSBC’s transactions are now on smartphones.

Bruce Weber, Dean and Professor at the Lerner College of Business and Economics at the University of Delaware, said in yesterday’s session at Sibos 2016, FinTech: Reshaping banking with co-opetition and disruption, that banks do not pay enough attention to adoption behaviour and the issues that can prevent it. “There can be fantastic technology or software in a lab environment, but it often isn’t successful in reality. Customers don’t always jump on board as fast as the creators of the technology imagine.”

All of the predictions about technology in the securities industry have been borne out, he added, but much more slowly than was anticipated; back in the early 1990s people thought it would take three to five years to move away from floor trading, but in fact it took 20 years.

Before a bank adds a particular product or service, it should analyse how the technology performs in relation to existing products and services and also how customers might react when they face the adoption decision. “More analysis needs to be done on why a customer decides to stop using an old system and adopt a new one,” he said.

By David Bannister, a principal analyst, financial services technology, at Ovum