Banks are approached by an ever increasing number of FinTech vendors daily, touting their capabilities to revolutionize customer experience or bring process efficiencies. Yet, banks are reluctant to jump too quickly into digital finance for the fear of becoming an isolated pimple on an elephant’s back, if that solution does not become the market leader in its space.
The concerns are legitimate. For any given type of problem in banking or wealth management there are at least several FinTech solutions that can meet the need, whether that is Robo-advisors or digital lending or payments apps. Most FinTech sub-domains are crowded and there have been $110B invested in FinTech globally in the last 10 years.
A recent report by Capgemini, suggests that over 95% of Fintech companies fail when they reach the scale-up phase. The ability to grow and retain an active customer base with the available funding runway often dictates success and failure for Fintechs. This means there will be inevitable shakeout and consolidation of players, so many banks to the “wait and see approach” unless the solution is critical at any given point in time and space.
With all the technological innovation in digital finance, for bank customers digital services haven’t changed as fast as the rate of FinTech product growth and proliferation. For example, while undoubtedly more things can be done through a digital brokerage account now than 10 years ago, there are still basics that mobile apps cannot accommodate. With one of the digital brokerage services I use personally, transferring funds from CAD to USD accounts still requires phoning the Call Center, although this is an inarguably simple transaction, for which several technology solutions exist.
What this suggests is that FinTech product innovation and FinTech product adoption, work at different speeds, where products brought to market by FinTechs outpace the rate at which they can be assimilated by banks to bring tangible benefits to consumers and to their businesses.
Both banks and FinTechs see collaboration as critical in their ability to grow and differentiate, “getting there” has been challenging for both sides, and both parties need to move closer to each other.
What’s happening at the bank?
Banks know that culture and legacy technology are the main roadblocks in FinTech innovation adoption. Culture in banks is conservative, process based, programmed in slow motion, and these traits are contrarian to what innovation requires.
As such, banks have taken a step towards FinTech collaboration by implementing a two speed approach in their operation: i. maintaining the existing business which requires reliability in execution, security and strong risk management; ii. they are also creating ways to operate at a 2nd speed, to allow them to experiment with FinTech solutions, driven by chief innovators or chief digital strategists in the bank. This 2nd speed is faster and more daring, and is driven through programs such as: larger scale investments in innovation labs, creation of innovations teams, or isolated Proofs of Concept (POCs) to enable experimentation with things like Robotic Process Automation, virtual assistants, machine learning, with some of the larger players taking an active role in industry-wide blockchain collaboration, such as R3’s Corda. The POCs goal is to gauge possible ROI but also the pitfalls of such projects if they ever go into full production.
However from these early stage experiments to actually adopting any FinTech solution there is a lot of sanitation occurring in the bank. Just because a financial institution is doing a POC it does not mean that the big cash day for a FinTech provider is necessarily in sight. POC is a great first step (and kudos if you got there), however taking anything from POC to production in a bank is where the down shift into the lower speed occurs.
Anything proposed to be deployed into production, has to pass ROI and budget justification, has to meet Internal Rate of Return targets (IRR) and has to do so better than hundreds of other initiatives in the bank competing for dollars. Then, it has to go through reliability, security and client impact considerations all of which belong to different departments which operate in silos for the most part. It is fully on the FinTech’s shoulders to bring all of this this together and that is certainly not for the faint of heart.
What should the FinTechs do?
Using the metaphor of one of my favorite educators, Professor John Monoky, it’s better to be a rash on a cow than a pimple on an elephant’s back. In business terms, this means that it’s actually more lucrative to have dominant market share in a niche, rather than be a small or insignificant player in a market which is too broad.
So how does one identify the cow and then generate the rash, especially as banks are sanitizing heavily everything, before it gets turned “on” in the full production phase?
Here’s the TEFE test:
1. Team: Who’s on your team?
The team needs to have credibility, specifically in finance and banking. Yes, there are skills that can be transitioned from other tech fields to FinTech. Being one of those individuals who is an immigrant to banking and not a native (I.e. I did not start my career in finance), it took me a decade to become pragmatic at it, and I still discover “wow” things every day. Without a critical mass of banking expertise on your team, you will have a much longer journey, with higher turnover and more twists and turns. Such banking domain expertise is needed in key product, services and sales functions. Also, more importantly, the team has to have the grit (aka “a positive, non-cognitive trait based on an individual's passion for a particular long-term goal or end state, coupled with a powerful motivation to achieve their respective objective.”).
2. Execution: Can you deliver value predictably?
Execution consists in the ability to make the technology work in the context of the bank’s business application, and to deliver tangible value. It certainly is a different challenge than making the technology work in a lab or showcase. There are 3 questions to ask and pass here:
- Can it be implemented in a quick time to value model?
- Is the implementation model systematic and scalable?
- Can the “before and after” effects be sustained and measured to validate ROI?
3. Focus: are you crystal clear on what the cow is?
Chasing too many opportunities reactively and all at once, could result in more pimples on the elephant and not the rash on the cow.
For example, suppose you built your core FinTech product or MVP as a specific solution to a particular customer segment’s problem. That was your POC with the financial institution that took the leap of faith to try new technology.
But after launching your first version of product you realize that, with a few added features or slight modifications your product could be used by an entirely new segment of customers. So lining up those opportunities and having internal consensus amongst product/ delivery/ sales on the definition of market segments, qualified, and the orderly roll out of product versions and distribution are key.
4. Eco-system: Do you have partners to help you propagate the rash?
Established industry players, conferences such as Finovate globally or local ones (i.e FinTech in Latin America), incubators, accelerators and podcasts are just a few of the dots on the eco-system map. Accelerators can be a great avenue in the Go To Market journey for FinTechs. One of the largest tech accelerators globally located in the heart of Sillicon Valley is Plug ‘N Play, with a dedicated their FinTech stream and some of the big FinTech names had their debut here (PayPal, LendingClub as examples).
Global, mature FinTech players like Temenos have stepped in to support FinTech adoption by banks with its innovative Marketplace platform which allows for curation and easy experimentation which are typical hurdles for financial institutions. Temenos has also introduced a series of yearly FinTech competitions around the world, aka “Innovation Jams” to expose FinTechs to resources that allow them to advance their business: meeting people (coaches, mentors, partners), practice their pitches, get feedback on how and where to focus, and more.
The eco-system is wide and broad and has to be navigated carefully, so that the right partners are selected for the right reasons, because focus is key to success.
Each sub-domain in the digital finance space (aka FinTech) is highly competitive and there is an oversupply of solutions. Moving from product market fit to scale is the billion dollar job. In fact, only a fraction of those providers who have product market fit will ever achieve scale. In most markets one can find a handful of early adopters who are keen to experiment with cool technology, but moving from being the pimple on an elephant’s back to being a rash on a cow requires TEFE at its best, with no room for error: team, execution, focus, eco-system.