How David can get Goliath’s attention
Financial technology today is in a transformative period: financial institutions and service providers have enjoyed much success and growth in a very competitive market, in no small part through the smart application of technology. But then two major events happened: first, the financial crisis of 2008, which has led to a lot of regulatory focus on activities carried out by financial institutions; and second, the rise of pay-as-you-go technology services, such as Amazon Web Services, etc.
For the banks, the first event means that a considerable amount of investment in technology is about protecting their existing infrastructure and capabilities: addressing stability, regulatory compliance and security, while trying to drive down overall costs. In many respects, this involves hunkering down on tightly controlled change processes.
In the fintech space, it has given rise to what The Economist referred to as a ‘digital primordial soup’ of technology-enabled services – an ecosystem of services that value (for now) agility and innovation over stability and security. The two domains seem destined to clash: it appears all but inevitable that if a nimble, innovative fintech business was bought by a bank, that it would end up killing the goose that laid the golden eggs. But, on the flip side, to become a paying customer of these services, banks need to be much better at incorporating these services into their overall business architecture.
Know Your Customer
For fintech firms, it is important to know who your ultimate customer is. For B2C services (where your customers are individuals rather than firms), your biggest asset from an acquiring bank’s perspective will likely be your customers, and not the technology as such. Banks will have plenty of buying power to buy a lot of customers, and what they do with the technology is less important. Indeed, an acquiring bank may feel they can serve the same customers better with different technology.
On the other hand, if you are targeting banks or financial institutions directly (i.e., B2B services), the technology itself will likely be of particular interest. Banks may want to leverage the technology and include it as a key part of their core processes and product offerings.
For smaller firms (i.e., not the major financial institutions, but boutique service providers, hedge funds, newer digital banks, etc) this is usually not a problem – integrating solutions into their architectures is generally manageable. But smaller firms typically have smaller pockets, so you need to get the attention of a lot of them to get a return on investment.
For larger firms, the big challenge is legacy information systems: banks today have internal ecosystems that are generally brittle and resistant to change. Even if a business line within a large firm wants to use a fintech firm’s services, their IT department may not be able to cost-effectively (or in a timely manner) integrate the services into the other processes or products that underpin the business. Only if the information being managed by the service provider is not core to any other process, and is not subject to regulatory control, will the business line be able to unilaterally use the service as part of their core operations – for example, for certain types of research or analysis activities.
Of course, all of this assumes that the fintech firm passes basic security and data protection requirements that any financial firm requires in order to integrate with a 3rd party service provider.
Preparing for the future
Organisations with a large legacy infrastructure base are beginning to look at how they can move into a more digital, agile world. There is increasing recognition that many of the functions traditionally carried out internally within organisations can now be done ‘in the cloud’, and that organisations of the future will be offering products and services that are composed of both internal capabilities and more tightly integrated externally sourced capabilities.
In the end, the successful fintech firms will likely fall into two primary camps:
The UX camp (which focuses on customer experience), and
The API camp (which focuses on providing enabling technology)
Those FinTech firms that provide both a strong customer experience, and strong, reusable APIs will likely be the unicorns – as it is difficult to excel at both.
All financial institutions today are embarking on significant business-led, regulatory-driven efforts to understand their data – and hence better understand their processes, products and services. As such, there will be increasing stewardship of what information goes into and out of a firm – initially for regulatory compliance purposes, but eventually for the purposes of supporting their digital strategy(s).
If you are a B2B fintech provider, you will likely increase your attractiveness and visibility to big firms if you have strong, transparent data governance. This includes helping firms manage what data is both going into and is going out of the service – ideally without needing to involve their IT departments directly (although IT departments will also benefit from this information).
Even with enterprise clients who love your product, there are obstacles even they can find hard to overcome when introducing your product into the enterprise environment. By reducing the need for IT departments to get involved, through the automatic provision of meta-data (data about data), integration resources and related tools, fintech firms can increase their likelihood of adoption in fintech environments and of eventual inclusion in core operating processes in client firms.