In the lead up to Finovate Europe, bobsguide asked show exhibitors and industry experts a series of questions to get the conversation rolling before the conference. Today's discussion is focused on whether 2017 will be a breakthrough year in establishing better working relationships and/or M&A activity between traditional financial services and fintech companies. Richard Dear, Business Development Director, Icon Solutions, Alex Kwiatkowski, Senior Strategist for Banking & Digital Channels at Misys, James Buckley, Director of Europe, Infosys Finacle and Tinna Hung, Director of Marketing at EyeVerify share their thoughts.
Better together: The changing relationship between financial services institutions and fintechs
Alex Kwiatkowski, Senior Strategist for Banking & Digital Channels, Misys
There’s something quintessentially romantic about the notion of going it alone. Scriptwriters know that movie audiences love rooting for the plucky underdog in a big-screen battle of triumph over adversity. Spectators in stadiums all around the world cheer loudest when they’re enthralled by a magical piece of individual sporting brilliance. Concertgoers sit – or stand – rapt while a musician demonstrates their virtuosity or a solo singer hits every note. Frank Sinatra did it his way. And now I’m going to state my case, of which I’m certain: Achieving sustained future success in financial services is accomplished not by performing activities in isolation, but by working collaboratively.
This type of exciting ecosystem allows revenue-boosting innovation to flourish, delivers a materially better customer experience and doesn’t give regulatory overseers nervous palpitations. It’s no longer a case of doing more with less. Instead, 2017 will be characterised by market leaders doing more things with more people (i.e. third parties) in order to achieve positive results.
Supplier rationalisation was all the rage in financial services a decade ago, for entirely legitimate reasons. Institutions wanted fewer relationships, preferring to work with a narrower selection of carefully cultivated strategic partners on operational and technological activities. Commercial considerations were a major driver – there was a strong suspicion that banks weren’t always getting maximum value for money from their providers of hardware, software and services – but having fewer throats to choke in the event of something mission-critical going on the fritz was a bonus.
However, significantly reducing the total number of supplying firms didn’t act as a springboard to underlying growth or hasten much-needed transformational change (be it either evolutionary or revolutionary in nature). There are many valid reasons for this, most obviously the challenging trading conditions which financial services institutions (FSIs) have been operating in, resulting in horribly inefficient performance at a macro level.
According to Gartner, FSIs spend 6.3 per cent of revenue on IT (only the software publishing & internet services industry invest more). Celent estimates total bank IT spending to be in the region of $200bn per annum, of which 75 per cent is allocated to maintenance. $150bn just to ensure the proverbial lights remain on: that’s not far off Slovakia’s GDP. In a fast-changing world, where the drive to digitalisation is sweeping through every vertical sector and a new era of openness in banking beckons temptingly to potential industry disruptors, merely keeping the fluorescent tubes glowing is laughably inadequate.
Now is the time for adventurous pragmatism. It’s about seizing the opportunity before somebody else does. 2017 isn’t a year for inertia, but for progressive acceleration. It’s not traditional banks in the blue corner, fintechs in the red and a gruelling fight to discover who the vanquisher is. Banks need fintechs, and fintechs need banks. Co-creation needs to take place, with genuinely valuable outputs in terms of new products, services and other innovations which benefit not just the bank (and its fintech collaborators), but customers, regulators and investors too.
Finally, readers of a certain age may fondly recall Victor Kiam, a US entrepreneur who famously “liked a product so much that he bought the company”. There’s absolutely nothing to prevent banks from making a similar purchase of fintechs: in fact, I’d be highly surprised if 2017 didn’t feature a slew of M&A deals and joint-ventures. Let’s leave single-handed heroism to the cinema, sports arena or music venue, and foster much-improved working relationships between ecosystem players of all ages, sizes, capabilities and specialities. The starting point is now.
The dynamic has shifted from one of competition to one of collaboration
Richard Dear, Business Development Director, Icon Solutions
2017 will be a breakthrough year for the relationship between fintech and traditional financial services players. In the last couple of years the market dynamic between fintech and incumbents has shifted from one of competition to one of collaboration.
Market data shows that the pace of investment has slowed and that M&A is on the increase. That’s to say that there are fewer new fintechs being born, and those that are in the wild are merging or being acquired. KPMG found that venture capital investments in fintech dropped by 49% in Q2 2016, yet the percentage of corporate-backed deals rose to nearly a third of all deals in the same period. This M&A activity is being driven by the larger banks looking to bolster capabilities to meet the demands of increasingly digital economy. Indeed, many have set up incubators – such as Barclays’ Techstars accelerator – to provide themselves with a captive market to drive innovation. And in turn fintech’s receive exposure, funding and commercial opportunities. These initiatives indicate the desire from both sides to shift to a relationship based on collaboration rather than competition.
So what has prompted this change?
Historically banks have not been at the forefront of adopting new technology. Under investment has primarily been the result of regulatory distractions. Banking crises, capital requirements, bonus’ etc. dominated board room discussions, not technology. With an increased digital imperative, they’ve now realised that taking proven technology from fintechs is a good way of plugging capability gaps and accelerating innovation. In parallel, regulation has also resulted in fintechs working more closely with banks in order to meet complex compliance requirements.
Ironically, regulation is now the primary reason why banks and fintechs are going to work even more closely together in 2017. For example, PSD2 forces banks to open their systems to Trusted Third Parties who can then offer services to their clients. Banks have realised that they need to work with Fintechs to both ensure and perhaps even strengthen their place in the value chain.
This all means that 2017 will be a breakthrough year for the relationship between Fintechs and banks; partnerships, strategic alliances and M&A will abound. The irony is that the group of upstarts that threatened to turn banking on its head a few years ago has gone from industry threat to industry saviour.
Collaborate, cooperate or merge? The shape of bank-Fintech partnership in 2017
James Buckley, Director of Europe, Infosys Finacle
2016 was an eventful year for the fintech market. Political uncertainty in the United States and United Kingdom cooled investment to just under US$3bn in the third quarter. Lending platforms in particular saw a decline in investment interest, but robo-advisers and insurtechs became increasingly active. Fintech firms began to mature and valuations tempered to more realistic levels.
So the stage is set for a wave of collaboration and consolidation in 2017. In the latest EFMA Infosys Innovation in Retail Banking survey, banks expressed increasing willingness to work with fintechs in different ways: Supplier-buyer partnerships (41 percent), direct and indirect investment (32 percent) and accelerators or incubators (27 percent). The Chief Operating Office of Citi FinTech says this will be a big year for “fintechgration” as more and more banks partner with fintech to mutual advantage. There will also be some consolidation, especially in the case of lending platforms, where the winners will pull ahead while the laggards fade away.
As banks and fintechs look to deepen their working relationships beyond open APIs, we can expect M&A activity to intensify. So far, there have been few mergers and acquisitions in the fintech space, relative to market size and disruptive potential. Based on what was disclosed, deals amounted to a little over US$37bn between 2013 and 2015.
That should increase as banks push ahead to close the gap to their much more innovative rivals, including start-ups, Internet giants and technology firms, all of whom are penetrating deeper into the business of financial services. Strategic M&A, such as BBVA’s acquisition of Simple and Holvi, will definitely be part of that plan. Incumbents will most likely focus on acquiring digital challenger banks for the customer experience they bring, and on wealth management start-ups in order to hold on to customers.
Incumbent banks will not be the only ones on the prowl, however. Technology companies, such as software giants, will train their sights on innovative fintech firms with customer experience solutions that have secured big banking clients. Fintech firms working in data analytics, security and fraud prevention will also be of interest to technology companies.
Given that banks and fintech firms will engage a lot more this year, what should they do to ensure the success of these partnerships? In our view, there are three key factors of success:
The route: One rather contrary view to the M&A idea is that it is better for banks to invest in improving their own ability to incorporate their fintech partners’ offerings than investing directly in the partner. Banks subscribing to this view should focus on upgrading their operational environment to engage and industrialize fintech offerings to the maximum.
The reason: In future, banks are likely to want more than ‘me too’ capability from fintech partnerships. If the idea is to scout for interesting business models, then banks should develop the necessary ‘venture capitalist expertise’ to assess the target business models and how well they would fit, in detail.
Reimagination: Over the long-term, banks might need to make significant changes to their organisations, both from an operating model and an insource outsource point of view. They will reclassify their business and technology processes based on which ones should be outsourced for cost efficiency, which should be reimagined with the help of Fintech partners, and which must be retained in-house.
It will be interesting to see how far bank-fintech alliances follow this script in the months to come.
The financial ecosystem is too complex to go it alone
Tinna Hung, Director of Marketing, EyeVerify Inc
Financial technology and services are changing rapidly, customer expectations are growing, and the ecosystem of different solutions has exploded. It is challenging for any company to meet these market forces alone. In 2016, we started to see the fintech/bank relationship shifting from competitors to allies, and that trend will continue this year.
Much has been written on the impact of technology-focused companies on overall consumer expectations. Companies like Uber are providing easy online and mobile experiences, and people are starting to look for the same in all of their apps. For example, if a customer can contact customer services from within a mobile app, and the representative that answers the phone has their information at hand immediately, customers start to expect that from all their apps – including in the mobile banking sector. They want to be able to conduct their banking and financial transactions on mobile with minimal effort.
In addition, fintech companies are providing consumers with valuable new services. Take savings. There are several apps that help people save – towards specific goals, by investing spare change, etc. Some of those apps not only help people save, they even make it fun. People are beginning to look for more proactive assistance with their finances. At the same time, they don’t necessarily want to have to download a dozen different apps.
Many financial institutions have realised that they do not have the internal expertise to meet rapidly changing customer needs, nor can they develop services fast enough to meet expectations. Specific to biometric authentication, we’ve had banks ask us: “What’s good enough?” There can be a lack of expertise not only on how to develop their own solutions, but even on how to evaluate technologies available.
The expertise challenge is compounded by the different types of fintech innovation. According to the Federal Reserve Bank in March 2016, there were 8,000 fintech companies in the United States alone. Solutions at Finovate Europe and past Finovate events include digital banking, mobile banking, core banking, robo-advising, customer acquisition, market adoption, social trading, loyalty programs, gift card programs, know-your-customer, biometrics, financial market intelligence, online bill presentment, cloud banking… and that’s not even scratching the surface of the wide variety of technologies and solutions available. No single organisation can stay on top of all of that in any kind of depth.
The willingness of banks to look outside their organisation for innovation is evidenced by the many accelerator programs launched in 2016 into 2017. Just a few examples include OCBC, Capital One, JP Morgan Chase and Bank of England. Accelerator programs give financial institutions one practical way to sift through the myriad of developments available and review selected options in-depth. This may lead to deeper understanding of technical capabilities, customer requirements, customer satisfaction, business impact, and more.
The benefits of collaboration for fintech companies in an accelerator program include guidance on working with traditional financial institutions, product feedback, insights based on large customer bases, and access to resources (not just financial ones). Collaboration through partnership or M&A might include immediate customer access and revenue. With some exceptions, trust in traditional financial institutions is high, and fintech companies can also gain trust by association.
However fintech and traditional financial institutions choose to partner, collaboration grows the pie, and everyone wins.