Banks and FinTech: date the nerds or be the nerd?
Key findings from the banking industry and its shifting landscape.
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One matchmaking grandmother tried to flatter the Facebook CEO by writing in a comment on his Facebook page that she always tells her granddaughters to “date the nerd” because he may just become the next Mark Zuckerberg. Zuckerberg, who has been responding to many, many comments lately while on paternity leave taking care of his adorable daughter Max, was quick to try (politely) changing the way she thinks about her granddaughters’ future prospects.
“Even better would be to encourage them to *be* the nerd in schools,” he wrote, “so they can be the next successful inventor.” On her own Facebook page, the grandmother marveled at the incredible attention to the post — 20,000 Likes and counting on Zuckerberg’s response — before noting that she does in fact “encourage” her grandkids “to do well,” adding that “I’ve done everything in my life MYSELF.”
Are nerds\hackers the new bankers? This is the question rolling around in the mind of Alexa Clay following the publication of her book, The Misfit Economy. “The whole mission that I’m on right now is how to we build bridges between mainstream economies and hackers,” she says.
Clay believes that the hacking spirit has a place “both inside and outside of our financial institutions”. Hackers have popped up in the financial world because of the opportunities that have been presented to them; because they have been given the license to operate by the societal remit of banks being called into question, because bureaucracy has suffocated ideas and because saboteurs will be saboteurs.
“This kind of ‘calling’ is something I’ve noticed in other species of hackers as well,” says Clay. “They bring their values and entrepreneurial ideas and mission into the financial institutions of the world. These are the kinds of entrepreneurs who work in big companies where they learn to navigate corporate politics and forge strong alliances in order to hack companies from the inside. They are not out for their ego but are looking to infect the cultures around them.”
The spirit of entrepreneurialism can be found everywhere though, even in the most unexpected places, and that spirit fuels the informal economies of the world, which are valued at $10 trillion. An important skill needed to flourish within these informal economies is the ability to embody the spirit of hustling. Many entrepreneurs in informal economies are born into poverty have this locked down, and yet also demonstrate the traits of formal entrepreneurs.
Even looking back through the historic culture of piracy, pirates were pioneers in democracy. “They really experimented with egalitarianism aboard their ships,” says Clay. We can also learn a lot by looking at the porn industry, she says. “Before video streaming tech was mainstream, it was actually pioneered in the porn industry. Similarly, McDonald’s didn’t invent the franchising model.” Franchising came from gangs.
“Hackers demonstrate the exact kind of spirit needed within the financial sector,” says Clay. “There are so many principles within these cultures that we can learn from. This is a spirit that is transforming the way we are going about solving problems.”
Ex-CEO of Barclays: ‘Uber moment’ is heading for the banking industry
Antony Jenkins, the former CEO of Barclays, has a nightmare vision for the future of big banks. In a speech in London this week he said: “The incumbents risk becoming merely capital providing utilities that operate in a highly regulated, less profitable environment, a situation unlikely to be tolerated by shareholders.”
Jenkins says a series of Uber-style disruptions in the industry could shrink headcount at traditional big banks by as much as 50%, while profitability in some areas could collapse by over 60% — huge predictions from a man who, until recently, ran one of Britain’s biggest banks. He adds: “In my view only a few [incumbent banks] will have the courage and decisiveness to win in this new field.”
[su_pullquote]Startups are the lifeblood of every sector. Challenging the market, bringing innovation, nourishing the competition and favoring the improvement of the ecosystem.[/su_pullquote] Jenkins, who was ousted as Barclays CEO in July 2015, says a new wave of tech-savvy startups that can do things better, faster, and cheaper than the big banks will disrupt their traditional businesses like lending, payments, and wealth management. He says: «We will see massive pressure on incumbent banks, which will struggle to implement new technologies at the same pace as their new rivals. That will make it increasingly challenging for them to deliver the returns and profitability that their shareholders demand.»
So how can big banks stop their dinner being eaten by nimble startups? Jenkins says: “Incumbents will need to address 3 significant issues.
First, boards will need to accept that we live in a discontinuous world. They should ask executives to take significant but calculated risks by working on projects that no one else is working on. Looking for a linear progression just won’t cut it.
Secondly, there shouldn’t be a technology strategy. There should only be a strategy with technology at its core. There’s a huge difference.
And thirdly, leaders need to lead differently. In my experience, people become more risk averse the more senior they become. But doing the same thing a little better is now the riskiest thing you can do.
The big question, as Jenkins points out, is whether these huge institutions can move fast enough to get ahead of the wave of change — or at the very least ride it.
“The number of branches and people employed in the financial services sector may decline by as much as 50% over the next 10 years, and even in a less harsh scenario I predict they will decline by at least 20%.”
If his predictions come true, Barclays could cut between 26,000 and 66,000 jobs worldwide, and shut between 280 and 700 branches on the high street. “The barriers to entry are quite high in financial services, so that will allow the incumbents to probably last longer than in many other industries,” he said. “The risk is that incumbents will be pushed into this utility, capital-heavy role that we’ve seen in other industries like telecoms. Ultimately, that will become intolerable to shareholders, so we could see consolidation and mergers,” he said.
He also said there was a major challenge for the banking industry in recruiting staff, discussing his recent visit to Silicon Valley which he described as a “ruthless meritocracy”. “If banks want to really compete for talent successfully, they are going to have to make themselves interesting places to work. It can’t just be about money, because frankly, money isn’t going to be there the way it was before 2008,” Jenkins said.[su_pullquote align=”right”]”Hackers demonstrate the exact kind of spirit needed within the financial sector”[/su_pullquote] Unlike their US counterparts, access to debt finance (see chapter about venture debt financing) – which can provide an attractive alternative to giving up equity – has not been widely available to UK tech companies.
Barclays says it will provide up to £5 million, repayable over three years, to firms that have won VC backing. A recent report by Barclays showed that UK technology businesses are expected to grow four times faster than GDP in 2015. Ashok Vaswani, chief executive of Barclays personal and corporate banking, says: “We identified a significant gap in the traditional way technology businesses were financed, and with this new drive we will be truly able to support businesses right from their inception, to becoming major global players.”
Capital One: “to think more like technology companies and maybe a little less like banks”
How will banks compete in a rapidly digitizing world? Capital One CEO Richard Fairbank knows. “We’re going to need to think more like technology companies and maybe a little less like banks,” he told investors on earnings call. His bank is notable for its high-profile acquisitions of not other banks, but innovators, and not necessarily even financial services innovators.
In the fall of 2014, for example, CapOne acquired user experience firm Adaptive Path. In January 2015, Capital One acquired Level Money, a personal financial management tool aimed at millennials. And while it is acquiring innovative companies, it maintains a robust internal innovation system, with Capital One Labs and its entrepreneurs in residence.
[su_pullquote align=”right”]In this new world, universal banks have to remain competitive in every area, and that’s a superhuman task[/su_pullquote]It also opened an innovation center in San Francisco in November 2014. (x – California-based Monsoon, a design studio, development shop, marketing house and strategic consultancy. The 40-person Oakland team, which has done work developing apps and sites for companies like Yammer, Zazzle, the NBA, HP, Cisco, Microsoft, Wells Fargo, and others, will remain in their offices following the deal’s close while the remaining staff – around 35 persons – will continue on as a rebranded agency called Kunai.)
But more to the point, Fairbank spoke at length about the need for digitize, which is a recurring theme for him. “One thing is absolutely clear and it’s – and we believed this from the beginning – that every bank is going to need to transform itself. The digital revolution is changing banking industry on almost every dimension that you can imagine. It’s changing what it takes to win in payments, in distribution, in marketing, in brand, foundational infrastructure, experience design, if you will, the way information is used. And in the end, that really means the role of talent is central to that kind of transformation.”
JP Morgan: “Silicon Valley is coming”
The man who runs America’s biggest bank can’t stop worrying about tech startups. In his annual letter to shareholders in April 2015, JP Morgan CEO Jamie Dimon warned investors and those in the banking industry that “Silicon Valley is coming.”
He wrote: “New competitors always will be emerging – and that is even truer today because of new technologies and large changes in regulations. The combination of these factors will have a lot of people looking to compete with banks because they have fewer capital and regulatory constraints and fewer legacy systems. We also have a healthy fear of the potential effects of an uneven playing field, which may be developing. Below are some areas that we are keeping an eye on.”
“There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking,” Dimon wrote in the letter. “The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and — these entities believe — effectively by using Big Data to enhance credit underwriting.” Dimon may have been alluding to businesses like Lending Club and Prosper, which enable lending between users and are both have valuations in the billions.
There are also a growing number of financial startups like Stripe, which handle payment transactions online and investing portfolio services like Wealthfront and Betterment. “They are very good at reducing the ‘pain points’ in that they can make loans in minutes, which might take banks weeks,” Dimon added in his letter. “We are going to work hard to make our services as seamless and competitive as theirs. And we also are completely comfortable with partnering where it makes sense.”
It’s not the first time Dimon has issued a warning about Silicon Valley businesses. “They all want to eat our lunch,” he told investors a year ago. “Every single one of them is going to try.”
[su_pullquote]“There were no events five years ago that banks were inviting [fintech firms] to,” Dwolla’s Mr. Milne says. “Now, the banks are paying for lunch.”[/su_pullquote] In the latest shareholder letter, Dimon even went so far as to acknowledge the competitive threat posed by Bitcoin and other payment alternatives. “You all have read about Bitcoin, merchants building their own networks, PayPal and PayPal look-alikes. Payments are a critical business for us — and we are quite good at it,” he said. “But there is much for us to learn in terms of real-time systems, better encryption techniques, and reduction of costs and ‘pain points’ for customers.” Bitcoin has yet to achieve mainstream adoption and its price continues to fluctuate wildly, but a growing number of big-name investors have backed these startups, including the New York Stock Exchange, which recently backed Coinbase, a Bitcoin wallet application.
Dimon appeared to express some annoyance about apps and other “free riders” that don’t have pay fees to move money, as banks must do. “Some payments systems, particularly the ACH system controlled by NACHA, cannot function in real time and, worse, are continuously misused by free riders on the system. There is a true cost to allowing people to move money,” Dimon groused. “We are going to work hard to make our services as seamless and competitive as theirs. And we also are completely comfortable with partnering where it makes sense.”
CheBanca!: “If one tries hard enough there is always a way to change things”
Roberto Ferrari, the General Manager of Italian CheBanca! and Board Member of Mediobanca Innovation Services, mentioned: “One can claim to have truly changed the market when one’s innovative solutions are adopted by the masses of clients, thus modifying the dynamics of the system itself. So, it takes a lot of intuition, speed, vision and a sense of priorities. It must be the customer experience that one wants to develop, neither compliance nor technology.”
The Italian CheBanca! is the retail bank of the Mediobanca Group. “We can define CheBanca! as a Fintech Bank, a new bank.” Born in May 2008, CheBanca! was the first financial institution in Italy to enter the market with a multi-channel distribution model that includes website, customer service and innovative branches. Many are the initiatives CheBanca! promoted to support (fintech) innovation in Italy. In few years in fact CheBanca! created a unique fintech community in Italy that acts as a catalyst for innovation. The bank has been recognized on many occasions as an innovator from flagship futuristic branches.
“It is an adventure because the sector truly lives on schemes, services models, and infrastructures that are decades old, inadequate for digitalization. Therefore, it may be more difficult when compared to other markets that have already been transformed (music, publishing, travel come to mind) but this does not mean that it is any less intriguing. It is necessary to have more strength and decision in challenging the status quo and not be stopped by the first objection “this can’t be done”. If one tries hard enough there is always a way to change things. Always.”
“Startups are the lifeblood of every sector. Challenging the market, bringing innovation, forcing incumbents to move, nourishing the competition and, thus, in the final analysis, favoring the improvement of the ecosystem. If someone sees them as a threat they are making a mistake. Those who wall themselves in are destined for extinction, it is just a question of time. We work with Fintech startups, we develop services. It is very good for us. And we help them grow and get stronger.”
Simple and BBVA: startup inside the bank
Banks not only compete with the upstarts for customers but also provide some of the key infrastructure they need to grow. The lenders can provide financial startups with capital as well as legions of depositors and expertise in dealing with regulators.
Simple, for instance, has more than doubled the number of customer accounts since its acquisition by BBVA Compass, a subsidiary of BBVA, in 2014 and is increasing users at 10% each month. Banks, meanwhile, are hoping for greater access to younger customers. “We had a little bit of bravado back then,” Josh Reich, CEO of Simple, said in an interview. “But there’s a reality that to be in financial services, you have to work with banks.”
In 2014, BBVA paid $117 million for Simple and has so far granted the tech firm near-complete autonomy, from separate human-resources staffers to branded company T-shirts. Mr. Reich has also kept his CEO title, reporting directly to the Simple’s board, which includes BBVA executives. “We want to keep away the antibodies that could crush a startup,” says Jay Reinemann, executive director of BBVA Ventures Group.
Simple turns away more than 70% of requests by global BBVA executives to visit, says Enrique Gonzalez, BBVA’s liaison between the two firms. “The main criteria is to let in those who can really add value to the relationship,” he said. When a team of BBVA bankers and lawyers recently stopped by Simple’s headquarters in Portland, Ore., they got to know their colleagues by playing arcade games in the office common room and sampling craft beers at the Oregon Brewers Festival. “We’re a little younger and nerdier,” said Simple spokeswoman Krista Berlincourt. “But I like to think of us as one fantastic extended family.”
Those perceived benefits have driven an increase in cross investments between longstanding banks and the new fintech cohort. As of September 2015, the six largest U.S. banks or their clients had participated in 25 fintech investment deals this year, including Prosper Marketplace Inc. and Circle Internet Financial Inc, compared with 26 in the first nine months of 2014 and 14 for the same period in 2013, according to Dow Jones VentureSource.
“Time humbles you,” said Ben Milne, co-founder of Dwolla, a digital payments platform that also linked with BBVA this year to offer real-time money transfers. Working with banks, he says, is the difference between running a sustainable business and “just another venture-funded experiment.”
Brett King, CEO of mobile-banking app Moven, wrote in 2010 that “the death of retail banking is here.” Now, Mr. King counts meetings with potential bank partners among his biggest priorities. In 2015, Moven was tapped by Toronto-Dominion Bank in Canada and the New Zealand unit of Australia’s Westpac Banking Corp. to provide mobile capabilities for their customers. “If I have my disrupter’s hat on all the time, they will just see me as the enemy,” Mr. King says of his more traditional rivals.
“There were no events five years ago that banks were inviting [fintech firms] to,” Dwolla’s Mr. Milne says. “Now, the banks are paying for lunch.”
As Apple, Google, Facebook and a host of smaller rivals sniff around the payments sector, MasterCard has been at pains in recent times to stress that it is more of a technology than financial services firm. The card giant has tweaked the dress code at its Purchase, NY, HQ to “relaxed business casual“.
This, explains worldwide communications team member Brittany Berliner, is “MasterCard’s next step towards establishing itself as inherently ‘techy'”. It’s not just the clothing that is getting more relaxed, the company has also built a games room packed with Xboxs, basketball hoops and ping pong tables. Berliner claims that adopting a tech hub culture sparks innovation and creativity, while also helping to eliminate the generational gap between management and millennial staffers.
As transformation of the banking industry continues, fintech firms and legacy banks are beginning to realize the benefits of working together to deliver innovative solutions and superior customer experiences to an increasingly digital consumer. Fintech firms see the advantages of leveraging banking’s large and loyal customer bases, experience with risk and regulations, a broad product set, established trust and the deep financial pockets of incumbent banking organizations.
“The danger is that innovative business models take a bite out of every part of banks’ product portfolios— skimming off their best customers and driving down fees. The problem is likely to grow as tech-savvy millennials, who have little loyalty to banks, begin to take larger shares of financial assets. In their worst-case scenario, banks become commodity providers of back-office functions, with lower growth and squeezed margins” (Economist Intelligence Unit report, ‘The Disruption of Banking’, October 15).
“If I were a betting person,” Phil Heasley, CEO of ACI Worldwide told EIU, “I’d say that some really smart banks are going to survive by merging with some really smart fintech firms.“ The EIU report added, “The process could be summed up as ‘keep two cultures, but integrate the technology back office’. This solution can preserve the culture of innovation, marry it to the assets of the bank, and accelerate the combined offering to market”.
Brett King, CEO and co-founder of Moven, bestselling author and Breaking Banks radio show host: “The banks I know all want to innovate, but silos, culture and process intransigence slow them down. Fintech partners enable banks to ‘bend space and time’ bringing change much faster and cheaper than banks could ever do internally. For fintech firms, the banks could be a great source of revenue.”
“When looking at the impact of fintech players on banking, the main people who should be concerned are not the banks, but the suppliers to banks. What fintech firms provide, in many cases, is ‘Suppliers 2.0″ and a real alternative for banks who are facing more complexity in the market than ever. To allow banks to work with with fintech players significant changes procurement and liabilities policies. In short, the old banks and the new fintech firms working together will teach legacy organizations new tricks and remove the fear factor from fintech.” – David Brear, Chief Thinker at the international consulting firm, Think Different Group, said.
As fintech firms grow, they will move from being a start-up to being a financial services firm with the realities of increased regulation and compliance challenges, the need for capital, scale and the expectation that innovation and new product development will continue in an agile manner. Legacy banking organizations can help with these challenges. While some fintech firms and banks will choose to continue on their current paths, the potential for ‘coopetition’ is significant.
Bad news for banks: fintech-startups are trying to reinvent finance and destroy traditional lending just teamed up. UK-based challenger bank Metro Bank has struck a deal with Zopa, one of the UK’s biggest peer-to-peer consumer lenders, to lend money over Zopa’s platform. The amount lent wasn’t disclosed but a source told Business Insider that it was around “millions a month”.
The pair signalled their ambition in the release announcing the deal, writing: “Zopa and Metro Bank believe this partnership is a great example of how disruptive financial challengers can collaborate to provide additional value and revolutionise the UK banking sector.” Both companies want to not only steal market share from the UK’s traditional banks but also force them to reinvent their business by doing so.
Management at both Metro Bank and Zopa have in the past said traditional banks do not to enough to cater to customers’ needs. Zopa’s CEO Giles Andrews said in a statement: “This partnership brings together two key challengers to the traditional financial services landscape and signals our intent to become a mainstream service.”
Asia-Pacific: learning-by-doing scenario
The head of Singapore’s DBS Group, Piyush Gupta, alerted over shifts in the banking model that could push many banks out of business in a relatively short period. He spoke of the “cataclysmic disruption” facing the industry over the next five years and suggested that banks unable to adjust to this disruption over the next decade would “die”, adding that perhaps a decade was being a little too generous on the timeline front.
Gupta, speaking at a conference in Singapore, observed that many Western banks have become so obsessed with dealing with the fallout from the financial crisis – including capitalisation, liquidity and corporate responsibility in the face of massive public outcry and a rising regulatory burden – that they are neglecting to fight “the battles of tomorrow”.
Southeast Asian super-regional financial services group DBS, which is based in Singapore, has launched a DBS fintech accelerator in Hong Kong, in a physical site called “The Vault”. As part of a drive to promote an ‘innovative and digital mindset’, DBS HK recently piloted its first Greater China hackathon, with participation from about 75 employees from Hong Kong, China and Taiwan.
[su_pullquote align=”right”]“The danger is that innovative business models take a bite out of every part of banks’ product portfolios— skimming off their best customers and driving down fees.”[/su_pullquote]Commenting on the opening of the accelerator, DBS (Hong Kong) CEO Sebastian Paredesstated: “DBS Hong Kong is a pioneer in leveraging digital and mobile technologies in our financial products and services. The DBS Accelerator programme aims to nurture a new generation of digital leaders and talent to secure Hong Kong’s future as a world-class FinTech hub.” Startup ventures will be guided through their business growth and development with the help of business mentoring from DBS HK and Nest senior executives, as well as other partners.
Neal Cross, the chief innovation officer of DBS Bank in Singapore since April 2014, has introduced a broad swathe of changes to the bank, building its capacity to innovate and adapt to the disruptive market developments of the future. “CIOs function to centralise innovation efforts in organisations, which tends to happen concurrently in different areas within the organisation. It’s more about standardising innovation processes, so that they’re using the same methodologies and language to communicate that innovation across to others.”
Singaporean bank DBS launched its DBS Paylah app to the Apple Watch. DBS Paylah is a mobile payment app for iOS and Android phones. DBS account holders can link their accounts to the app in order to add funds to it. The funds are stored in the app’s mobile wallet and can be used for online payments, online purchases (with selected merchants), donations, and micro-payments between friends. The Apple Watch version of Paylah is basically an extension of the iPhone app, enabled through bluetooth sync between the two devices.
In July 2015 Malayan Banking Bhd‘s (Maybank) fintech startup programme, MaybankFintech has garnered participation of a total 115 technology startups, including 109 from the region since its launch at the end of May. Maybank Group chief strategy officer Michael Foong said MaybankFintech is a great opportunity for Maybank, Malaysia’s largest lender by asset size, to harness the startups ecosystem regionally and to acquire the best innovation ideas in financial technology. At the end of May, Maybank partnered accelerator 1337 Ventures to launch the programme.
Maybank aims to help grow and support entrepreneurs by providing them with an avenue to connect directly with the financial industry. “We are now seeing increasing openness among venture capital firms and banks in this region to listen to these startups and support them, given that these companies themselves stand to benefit should the startups succeed with their projects,” Foong said. Maybank foresees technology startups to exponentially grow in the ASEAN region as more businesses seek to expand their digital presence and increase revenue using non-traditional channels.
As banks seek to strengthen their position in the digital space globally, with their sights trained on harnessing future technologies, the biggest changes — from a consumer’s perspective — are mobility and a reduced reliance on physical branches, said Standard Chartered Bank’s first group chief innovation officer Anju Patwardhan. “I am focusing on the use of emerging technologies and data science and how we can process this data for actionable insight. After all, data are the new natural resource to be mined with more and more smartphones … In many parts of the world, I have seen people with more access to smartphones than drinking water or electricity,” Ms Patwardhan told.
Westpac has launched its new online banking platform “Westpac One”, redefining the way customers are able to bank using mobile devices. It is the first fully-responsive platform in New Zealand and the one out of some in the world to offer easier, faster and more intuitive functionality across all devices – smartphones, tablets, and desktop.
New York fin-tech start up Moven’s money management tools are also integrated into the platform giving real time insights and awareness of everyday spend, with categorisation of spend and real time receipts coming in the near future. Moven, along with everyday activities like checking balances and transferring money between accounts, will be made faster and easier with no need to log in once set up.
Accenture and a group of 10 leading financial institutions opened FinTech Innovation Lab Asia-Pacific, kicking off a competitive search for the top fintech innovators in the region. The 12-week program helps early- and growth-stage financial technology innovators accelerate product development and gain exposure to the top-level financial industry executives.
Entrepreneurs developing potentially game-changing technologies for financial services – particularly in the areas of alternative currencies, Big Data and analytics, mobile and wireless payments, risk management and compliance, as well as social media and collaboration technologies – are invited to apply.
While there are admittedly a growing number of accelerators for fin-tech hopefuls to choose from in APAC these days, what Accenture’s programme does – is delivering a mentoring from some of the industry’s biggest heavyweights, including Bank of America Merrill Lynch, China Construction Bank (Asia), China Citic Bank International, Commonwealth Bank of Australia, Credit Suisse, HSBC, JP Morgan, Maybank, Morgan Stanley and UBS.
The other global FinTech-focused accelerators include Plug and Play, FinTech Innovation Lab (New York), QC FinTech Lab, Startupbootcamp and Level39. Many banks like Citi, Barclays and Wells Fargo also have their accelerators to foster innovation.
World Bank, McKinsey and Goldman Sachs advising banks to partner with fintech, not to compete
The modern customer can easily maintain multiple accounts at banks without much physical infrastructure, investing savings with the likes of Lending Club, using an online-based institution like Germany’s Fidor Bank, making international transfers through TransferWise, and otherwise taking advantage of the way the tech industry is slicing and dicing the traditional banking business. In this new world, universal banks have to remain competitive in every area, and that’s a superhuman task. There are probably executives out there who can handle it, but they’re so rare that the banking behemoths set up before the technological revolution are struggling to recruit them.
[su_pullquote align=”right”]Millennials are digital natives and have an affinity for online or mobile user interfaces, automated and frictionless processes, and transparency of data and information[/su_pullquote] The world’s top banks and insurers are seeing their business models challenged by “fintech” start-ups, which are reshaping what consumers and businesses expect from financial services, industry insiders and experts say. A report of the World Economic Forum (WEF), the Swiss-based corporate think-tank which runs the Davos summit of world leaders, says major disruptions lie ahead for the once highly profitable financial services industry.
The generation born after 1980 have largely abandoned bank branches already. Younger people turn instead to virtual fintech brands such as eToro for social-media style investing, Moven in mobile banking, Prosper for loans and a growing number of crowd-funding platforms to finance projects.
“Bankers always claim that they are close to their customers because they have all these retail branches,” Berlin fintech entrepreneur Valentin Stalf said in an interview. “I think branches are holding banks back from reaching their customers.”
Bankers who once thought financial regulation was a barrier to the new entrants are seeing non-bank fintech rivals go after their most profitable markets, while avoiding regulated pieces of business, said Huw van Steenis, head of European bank research at Morgan Stanley, who contributed to the WEF report. In investment management, “robo-advisors” have begun to automate wealth advisory roles, calling into question face-to-face meetings and proprietary distribution channels.
While challenges to banking are more imminent, insurers may face bigger threats in the long-run as troves of online data usher in new types of personalized health, life and drivers insurance, upending the model of mutualized financial risk that has been at the heart of the industry, the WEF report predicts.
Most of new fintech firms selectively partner with technology providers who possess their own banking licenses, rather than waiting to procure banking licenses in country after country. They partner and outsource much of the underlying technology they use, slashing costs, while boosting flexibility.
‘Bankers used to think regulation would make financial services less appealing for new entrants, but now the penny is dropping that non-bank rivals can just attack more profitable areas and skim the cream’, said Morgan Stanley’s Huw van Steenis. Banks might not be facing an existential threat – after all they still control most of the cash that’s knocking around. But they will need to make themselves more nimble and open to change if they want to maintain a firm grip on their market.
Both reports still see life ahead of major financial service brands, but not as universal, full-service banks or insurers. Instead they predict an era of growing specialization while relying online partnerships to deliver non-core services. Incumbents are learning new tricks from challengers, adapting existing services to make them convenient for customers and finding ways to collaborate with new fintech players, leading industry dividing lines to blur, both studies agree.
In September 2014, McKinsey released a report overviewing the need to modernize payments. The report acknowledged the “global trend toward improving payments systems and architectures on a national scale”:
High-profile initiatives are under way in the United Kingdom and Australia, while lesser-known but equally intense efforts to modernize and compete have been launched in countries including Thailand, Turkey, Colombia and Bahrain.
In the UK the focus is on improving the speed of payments; in the U.S. and some other countries, the entire payments system is being optimized—a comprehensive approach in which speed is just one variable. In Thailand and other countries, payments systems are being upgraded as a means to increase the banked populations, while also reducing physical cash transactions.
The consulting firm further concluded that “financial institutions have four clear, compelling reasons to invest in improving payments infrastructure”: payments are central to the banking customer relationship. Payments touch points foster customer engagement, satisfaction and loyalty, and provide banks with the opportunity to grow or maintain their share of customers’ wallets. The digital convergence of commerce and payments has attracted new competitors who are developing convenient, faster payments solutions. These players will intensify the competition for payments and threaten banks’ position unless banks innovate and invest in better systems.
The many success and failures of mobile payments and related solutions drives home a very simple fact: one mobile-based financial solution will not cater to all markets. The mobile finance space itself is so vast: you have payments, payment-related services and commerce.
The mobile payments market got its first real push from developing markets, because this customer group had very fundamental financial requirements. Using a mobile payments system essentially provided them easy and fast access to their personal accounts. Without such a system in place, they’d still be conducting all financial transactions in cash.
The wide gamut of mobile payments includes applications, content, and, most importantly, knowing what a customer wants. The bottom line is simple; all these elements are important parts of the payments game. First and foremost, and let’s get this out of the way once and for all-mobile payments aren’t going anywhere. They are and will continue to be a priority for every stakeholder in the mobile financial services space. Mobile money has moved beyond hype and is establishing itself as a lasting trend.
McKinsey: banks face wipeout almost two-thirds of earnings
The digital revolution sweeping through the banking sector is set to wipe out almost two-thirds of earnings on some financial products as new technology companies drive down prices and erode lenders’ profit margins. This is one of the main predictions by the consultancy McKinsey in its global banking annual review, portraying banks as facing “a high-stakes struggle” to defend their business model against digital disruption.
McKinsey said technological competition would reduce profits from non-mortgage retail lending, such as credit cards and car loans, by 60 per cent and revenues by 40 per cent over the next decade. It predicted a smaller, but still significant, chunk of profits and revenues would be lost from payments processing, small and medium-sized enterprise lending, wealth management and mortgages. These would decline between 35 and 10 per cent, McKinsey said.
“Most of the attackers do not want to become a bank,” said Mr Härle, co-author of the research. “They want to squeeze themselves in between the customer and the bank and skim the cream off.” McKinsey said banks last year made $1.75tn of revenues from origination and sales activities, on which they earned a 22 per cent return on equity, while they made $2.1tn of revenue from balance-sheet provision at a return on equity of only 6 per cent.
The consultancy said the industry had two choices. “Either banks fight for the customer relationship, or they learn to live without it and become a lean provider of white-labelled balance sheet capacity,” it said.
Over $4 trillion in addressable revenues and $470 billion in profit at traditional financial services companies is at risk of being disrupted by new technology-enabled entrants, says a recent report by Goldman Sachs. The investment bank took an in-depth look at what it calls the “socialisation” of finance and analysed the potential growth of what it sees as the main sectors benefiting from the changing times: crowdfunding, wealth management, payments and lending.
It defines the “socialisation” of finance as the impact of technology and changing behaviour on financial services markets. Goldman’s report says: “The financial services industry is becoming increasingly social and democratic as it continues to move online and becomes more automated, at once empowering consumers, disrupting existing banking and credit systems, and creating new markets.”
“Millennials are digital natives and have an affinity for online or mobile user interfaces, automated and frictionless processes, and transparency of data and information, thereby gravitating toward platforms that bypass the traditional lending processes, which are generally in-person, involve a lot of paperwork, and can be opaque.” They call this generation “HENRY”- high earning, not rich yet.
Why hackathons are bad for innovation?
Hackathons are fun. They’re quasi-social opportunities to work on something important with smart, passionate people. For companies and universities, they represent quick, relatively inexpensive ways to encourage collaboration, produce new ideas, and generate publicity. But they very rarely spark real, lasting innovation.
Innovation is usually a lurching journey of discovery and problem-solving. As a result, it’s an iterative, often slow-moving process that requires patience and discipline. Hackathons, with their feverish pace, scant parameters, and winner-take-all culture, don’t just sidestep this process, they discourage it. And while that’s a reason for their appeal, there’s very little evidence of hackathons that lead directly to major market successes.
Arguably the biggest disadvantage of hackathons is also their draw. They’re often willfully divorced from reality. The formula is pretty standard: Throw a bunch of diverse teams together in a novel setting. Provide them with more playful materials than they’d normally encounter. Then put them to work on a worthy challenge where, at least at first, no ideas are rejected. This can have some real upsides; exposing people to different perspectives is a surefire way to get them to look at problems in a new light. New spaces and unusual materials can stimulate creativity.
“Solving” a problem in a vacuum, however, is a waste of time and money. When hackathon participants don’t have the right contextual knowledge and technical expertise, they tend to come up with ideas that are neither feasible nor inventive. Worse yet, these flaws tend to go unrecognized in the limited time that the events take place.
Hackathons usually frame challenges by paring them down artificially. Exploration is confined to what can be done in the room or online. It’s difficult to do serious market research or meaningfully use case studies and financial modeling, let alone investigate potential side effects of any given proposal. Long after the hackathon is over, due diligence might reveal that several competitors are already doing something similar, clients already rejected the idea years ago, or the company can’t manufacture a prototype that meets the specs.
What’s more, hackathons typically create a false sense of success. Every hackathon proclaims its winners and awards prizes. But what if none of the ideas are really any good? It tends not to matter. The top team still gets a check and the very fact that the organization hosted a hackathon ticks the innovation box.
Hackathons trigger blips of great energy. But to sustain it in a way that creates real impact, leaders still need to inject the same excitement into every stage of the development process. That’s not an easy thing to do, but real innovation depends on it.
If your company has decided to set up an innovation outpost, how do you actually do it? How do you staff it? What should the team in the outpost be doing day-to-day? In what order? Successful innovation outposts typically develop over a period of time in three stages. In the first stage, the outpost focuses on networking and partnering in the innovation cluster where it is based (i.e. Silicon Valley, Boston).
In the second stage, it moves into investing, inventing, incubating, and acquiring technologies and companies. In the third stage, it focuses on building product(s). Each stage needs a clearly defined set of objectives and the right team to match those objectives. In Stage 2, the corporation adds venture capital and/or mergers-and-acquisition teams.
Examples of Stage 2 outposts include BMW’s Silicon Valley development group, working on self-driving vehicle technologies, while their venture group has been making investments in companies like ChargePoint and Nauto. Another example is Qualcomm, which invests around robotics and incubates in collaboration with Techstars.
In Stage 2, the corporation is starting to invest serious time and money into the outpost. Therefore, it’s important to have a permanent executive running the innovation outpost and reporting to the company CEO. Appointing outpost leadership as a temporary assignment leads to weak relations between the innovation ecosystem and the innovation outpost and increases the risk of failure.
Examples of Stage 3 outposts include Verizon (which has been developing its mobile video player, infrastructure, monetization/advertising, and analytics product(s) in Silicon Valley; Walmart which has acquired, invested, and been implementing its commerce platform in its San Bruno center; and GE, which has created a software development organization around big data, and its Predix platform, which works with GE units that focus on big data.
Ikea usually keeps a close lid on what it is working on next. But with Space10, an innovation lab opened in Copenhagen’s hipmeatpacking district, Ikea is looking to change all that. The Swedish furniture giant is throwing the doors wide open to progressive thinkers who want to help solve the next couple decades’ biggest home design problems, all on Ikea’s dime. “Instead of just creating a better future for Ikea, our starting point was asking how Ikea could help create a better future for the world,” Caspersen says. “So what we suggested was, let’s get rid of the whole client-agency model, have Ikea pay the basic fees and costs of running a space, and then devote ourselves to looking 10 or 20 years down the pipeline, and how Ikea can be relevant in that world.” Toyota has big plans for artificial intelligence—and not just in cars. The automaker is earmarking $1 billion in funds for a new subsidiary called the Toyota Research Institute (TRI). The R&D firm will focus on building artificial intelligence products for automobiles and the home.
“Innovator’s Dilemma”: are the banks capable of making innovations by themselves?
The theory of disruptive innovation was invented by Clayton Christensen (the most influential business thinker in the world, according to Thinkers50), of Harvard Business School, in his book “The Innovator’s Dilemma”. Mr Christensen used the term to describe innovations that create new markets by discovering new categories of customers. They do this partly by harnessing new technologies but also by developing new business models and exploiting old technologies in new ways.
He contrasted “disruptive innovation” with “sustaining innovation”, which simply improves existing products. The only possible solution for a big corporation is to detach an entire team or even a company that will be responsible for working on “disruptive” innovations. They get a separate office and unusual titles, they are not obliged to keep any dress-codes or working hours, they don’t have to defend their budgets or KPIs based on typical corporative standards. These people should have an entrepreneur’s spirit – even when they are hired managers. This way the company artificially creates their own startup – they must feel like this company belongs to them and they work for themselves.
Due to my work I meet a lot of bankers from around the globe and see their attitude to fintech startups: some don’t bother at all, some laugh, some even play with them as if they are some trendy toys (running hackathons and accelerators), some say they would realise better services using their current employees and technologies… Two banks that staggered me the most (that have also succeeded in fintech) are BBVA and Goldman.
There 12 lessons, that everybody can learn from their experience:
1. Investing early on for insights, not profits.
2. They are most interested in forming partnerships (not competition, buying, white-labeling or doing by themselves)
3. Learn from startups instead of teaching them.
4. Big banks corporative culture may kill startups if those would be placed in the corporative environment of corporations.
5. While banks are competing with other banks somebody will disrupt them. We “try to disrupt ourselves”.
6. Learn from your own mistakes: banks are loosing trust and startups may help them bring it back.
7. Make “disruptive innovations”, instead of “sustaining innovations” – internal hackathons and fake accelerators create solid PR, but they don’t give rise to new entrepreneurs and unicorns.
8. If you have money – you have to invest in new ideas and blood.
9. Mindset matters: you have to move from “Wall Street” to “Silicon Valley”.
10. Banks must stay banks (and let startups do their job) – they are good ay this.
11. Walk more in founder’s shoes. Entrepreneurs aren’t swayed by big checks; often they want investors who’ve walked in their shoes, who’ve taken an untested idea and built it into a successful business.
12. Open the world with your startups: they can bring you new markets.
Photo credits: getty, shutterstock, company profiles.
Life.SREDA VC is a global fintech-focused Venture Capital fund with HQ in Singapore