Financial Institutions and FinTechs: (Now) a contemporary tale of collaboration and mutual co-existence
Robert Grant, in the publication ‘Contemporary Strategic Analysis’, summarises the evolution of strategic management through several distinct phases:
Financial Budgeting (circa 1960’s) with a focus on operational budgeting and discounted cashflow capital budgeting and forecasts
Corporate Planning (circa 1970’s) based on assessment of medium term economic forecasts
Emergence of Strategic Management (circa 1980’s) through detailed industry analysis and assessment of competitive positioning
Quest for Competitive Advantage (circa 1990’s) with an emphasis on resource and capabilities of the firm and cost reduction through out-sourcing and delayering
Adapting to Turbulence (since 2000’s) characterised by adapting and responding to digital technology, and a quest for flexibility and innovation, often through alliances
As practitioners, we see aspects of each phase evident today in the strategy planning processes in many organisations. Many are still thinking in terms of competition, winning, control and ‘owning’ customers. This is appropriate, but it is not the only mind-set or perspective that can underpin a sustainable strategy.
A common theme across most Whitecap clients and many organisations across several market sectors is how to analyse, assess and respond strategically to turbulence in the markets the organisation operates in.
Typically, this turbulence is caused by a combination of one or more of the following external factors: regulatory change, digital technology innovation and changing consumer behaviours and expectations.
As with the evolution of strategic management, outlined above, we are increasingly seeing organisations realise that they cannot address these issues on their own. They are realising that collaboration is the best way forward; which places new challenges for organisations and their strategic planning process and strategic decision making.
This is particularly evident in Financial Services.
On the one hand, there are the legacy dependent and established financial institutions facing a raft of regulatory changes including Open Banking, PSD2 and GDPR. At the same time, they need to drive digital improvements to meet customer needs and also remain competitive against challengers and new entrants.
On the other hand, there are the recently established, often PE backed, innovative FinTech start-ups seeking rapid scale and growth to fulfil their potential and deliver tangible and material commercial benefits and outcomes.
Several years ago, when FinTechs first emerged, their narrative and attitude was focused on disruption and disintermediation. Consequently, many financial institutions viewed them with concern and a high degree of wariness. Also, some were dismissive that these start-ups would make any material impact due to size, experience and / or operating model. Was the purported innovation actually real or merely the ‘Emperor’s new clothes’?
Today, we are seeing that both established financial institutions and the recently established FinTech start-ups are recognising the need for each other. Some FinTechs need the established organisations for customers, scale and route to market. And financial institutions benefit from the innovation and creativity provided by FinTechs.
So, the narrative has changed on both sides and they are moving closer together. But both still need to work out how to collaborate.
Of course, there are examples of new FinTechs seemingly building scale and growing their presence in core banking related services, such as Revolut, Curve and Tide. There are also good examples established FinTechs such as Zopa, Funding Circle and Quint who have an established presence dating back a number of years.
The theme of collaboration is also not a new one. Partnerships exist including Barclays and a group of several FinTechs including Nivo, Barac, Alyne, Shieldpay, Courtdesk, Homeppl, Flux and Simudyne; RBS and Funding Circle; KPMG and Xero. Global technology giant Unisys have partnered with Sandstone and PCT to deliver their ‘Elevate’ digital banking proposition, and are working with BehavioSec to deliver a biometrics solution. Finally, there are examples of established organisations developing in-house ‘FinTech’ solutions such as Clydesdale & Yorkshire Bank’s B Account.
For established financial organisations considering collaboration with FinTechs, the findings of the recent KPMG survey will be of interest:
97% of survey respondents saw FinTech as a positive opportunity
57% saw FinTech as a major source of disruption over next 3-5 years
50% of firms don’t have a well-defined strategy on FinTech
70% don’t have a well-defined framework to assess FinTech opportunities
81% said that they would want to partner with FinTech in next few years
These results reflect that many organisations have a good understanding of what FinTechs are and that they will be a major force in the industry, but that their strategic purpose and benefits, and their engagement and partnership models are not clear.
From a Whitecap point of view, here are some thoughts about the considerations a financial institution may benefit from when thinking about working in practice with FinTechs:
1. Strategic aims, business model and partnership purpose
2. Commercial objective alignment between the parties
3. Customer ownership, touch points and the reduction of friction
4. Contractual and compliance arrangements
5. Value chain share and degree of integration
6. Investment costs and the benefits case
7. Risk to operations and product / service delivery
8. Technology integration and inter-dependencies
In addition to these strategic and commercial considerations, another aspect that will be critical for a successful relationship is the cultural dimension, which will be evident through the initial engagement, procurement, contracting and implementation phases. Nimble and agile FinTechs with small teams and limited resources will have to learn how to work large scale, process and risk orientated financial institutions; and vice versa.
The number of potential FinTech partners and the range of additional capability they offer established financial organisations is impressive, and expanding regularly. What does this dizzying array of potential ‘bolt on’ capability mean for incumbent financial service providers and for their strategic decision making and planning?
We think it means there needs to be a shift in focus so that strategic planning is anchored around an exceptionally clear understanding of the organisation’s customer value proposition.
To achieve this, we believe organisations need to understand, with precision, the following three things:
1. What shape the organisation wants the portfolio of customers to take over the planning horizon?
2. How does the organisation expect revenue to flow from that portfolio into the P&L?
3. What promises is the organisation going to need to make and keep to those customers to meet strategic ambitions?
The identification and evaluation of collaboration opportunities can then be contextualized and made to serve a clear, customer and revenue-led purpose, whether that is through tactical enhancements or more significant strategic partnerships.
Either way, financial institutions need to go beyond the ‘FinTech headline’ and assess individual FinTechs to understand their offer and the potential fit and benefit, be that front-end customer facing engagement, products and services, or back-end processing.
Other recent Whitecap posts on FinTech: