FinTechs working with banks: Expleo's guide to overcoming the pitfalls
Following the UK Department for International Trade’s UK FinTech State of the Nation Report in May this year, Expleo Client Director, Kate Cordell, offers advice to FinTechs on best practice when working with traditional banks.
Banks and FinTechs are increasingly in need of each other. For incumbent banks, the adoption of new technology is business critical in the face of changing customer expectations and increased competition from more agile challengers. For start-ups, limited audiences and market consolidation is making partnership more attractive than going alone. But integration is rarely straightforward, especially when it brings two such different cultures together.
The FinTech industry has matured in recent years, creating new business dynamics that call for a more peaceful approach. Meanwhile, banks are building their own technology to get ahead of competition and fast-track innovation, with 56% of traditional financial institutions having put disruption at the heart of their strategy, according to the UK Department for International Trade’s UK FinTech State of the Nation Report which came out in May 2019.
Nonetheless, banks still face limitations that FinTechs can solve. FinTechs can help banks engage younger audiences as well as deal with the challenges presented by re-architecting both the technology stack and their operating models. FinTechs that help banks to navigate regulation and monetise their customer data may enjoy considerable success themselves.
For FinTechs, the security of partnering with an incumbent has become more attractive, given the growing number of start-ups and the shrinking number of opportunities. FinTechs are also finding their ambitions curbed by the dominance of the big high street banks. By joining forces with the banks, FinTechs are better positioned to access the global mass market.
Are we therefore moving into the era of co-disruption?
82% of incumbent banks expect to increase FinTech partnerships in the next three to five years. Lloyds’ decision to partner with Thought Machine (TM), to accelerate and ease the pain of digital transformation, is an interesting indication of where the market is headed. Lloyds will migrate 500,000 customers onto Vault, TM’s cloud-native core banking technology.
ClearBank, the UK's first new clearing bank in more than 250 years, aims to compete on price, because its cloud-based tech platforms are unencumbered by labyrinthine legacy systems. FinTechs that can offer the golden combination of lower cost and reduced friction to banks will find a willing partner.
However, the practicalities of working together are less clear cut. Given that many FinTechs were conceived as an alternative to traditional banks, how can these potential competitors come together?
Expleo has identified five major hurdles that need to be crossed before FinTechs can reach the finishing line:
Challenge #1: How to improve your ecosystem
With competition increasing, it can help to meet the right person on their terms by getting involved in accelerators and innovation labs. Collaboration with an organization that already works closely with banks can help secure privileged access to potential partners and give an insight on their pressing issues.
Challenge #2: How to progress within the bank’s culture
Slowed down by legacy systems and bureaucracy, banks can lack the internal processes to fast track the embedding of new solutions. In the eyes of the FinTech, they are following a more convoluted route than necessary, but this is due to the complexities of scale. This is frustrating, but also largely unavoidable – FinTechs should prepare to reset their watch.
Challenge #3: How to tackle regulation, compliance and cybersecurity
The bank’s need for control can feel bureaucratic, but those restrictions are there to deliver a high quality, stable product. FinTechs that underestimate the enormity of milestones or the need to demonstrate the right depth of due diligence, run the risk of losing the confidence of both the regulator and the market. FinTechs must provide robust evidence that their tech is fit for purpose, differentiated and will address the customer need.
Challenge #4: How to manage change with structure and agility
Capability modelling, target operating models and process mapping can be low on a FinTech’s to-do list, but they provide valuable infrastructure for smoother progress. For example, a lack of governance of the ecosystem and processes can lead to poor visibility on the project. The right management consultants will be able to help both sides to prepare for the business change impacts from merging two very different cultures.
Challenge #5: How to prepare for scaling up
The pressure to expand a successful pilot and demonstrate proof of value as soon as possible can lead to rapid growth that causes your architecture to creak at the seams. Having a focus on quality in design stages will provide confidence to the bank that your technology will be successful at scale. Quality in design means paying careful attention to how the solution will be tested and proven – if this is overlooked it can be difficult for the implementation teams to evidence the quality of the solution before it goes into production.
Learn from experience, not your own mistakes
Disciplines such as stakeholder management, compliance, quality management and change management are critical to a successful partnership with a bank. For FinTechs without expertise in these areas the right third-party support can save considerable time and effort.
Entrepreneurs are naturally inclined to take on everything themselves. When things go wrong, they can end up calling for a ‘white knight’ to ride to their rescue and get the deal back on track.
Therefore, it may prove more cost effective to engage a ‘black knight’ that can help you navigate the most common pain points in a proactive way. Why learn from your own mistakes, when you can benefit from another’s experience?
Read the full FinTech report here.
FIVE things fintechs must do to keep investors onboard
New investors flocked to the stock market during the COVID-19 pandemic. Thirty-eight percent of investors said they had never had a brokerage or similar account before opening one in 2020.
Low or no-fee trading options have helped accelerate the trend – nearly half of new investors said they accessed their account primarily through a mobile app. As FinTechs, how do we create the trust needed to keep new investors in the market and create a fruitful customer experience for them?
The financial industry does a disservice to individual investors if we merely offer tools that focus on making money quickly, an approach that usually backfires. Instead, the surge of interest presents an enormous opportunity for those who want to help more consumers use financial technology to educate them on responsible spending, saving, and investing in order to achieve financial wellness current fintech tools have welcomed individual investors in the door.
Now, it’s time to focus on education and improving their experience going forward. There are several ways those of us in fintech can step up to shape the future of retail investing so that it works better for everyone, starting with the following areas.
Equal access to financial wellness education
Financial health should be available to everyone — but today, not everyone has the educational resources to achieve it. One study shows that only 3.9% of students from low-income schools were required to take a personal finance class. What they aren’t learning in school or from family members, fintech companies can provide on their platforms.
The companies should move from solely offering financial services to a more responsible model of education, advice, and prescriptive choices to help consumers develop better habits and make wiser financial decisions. Not only can they empower consumers and bridge historical wealth divides, but they can also stimulate growth by opening up new consumer segments.
Just as we’ve come to expect that our fitness routines are tailored to our individual bodies, we’re also ready for finance tools that go beyond one-size-fits-all solutions. But only six percent of financial institutions say they’re using the kind of technology that allows them to deliver a deeply personalized experience. Fintech tools need to reflect that financial success looks different for each of us.
For one consumer, it may mean providing guidance on how to pay off student loans early; for another, it may mean prescriptive actions that enable them to stick to a budget for the first time; for a third, it could look like prioritizing environmental, social and governance (ESG) investments, so that her portfolio aligns with her political beliefs.
Now, we are seeing financial technology beginning to meet the demands of personalized finance in a substantial and meaningful way.
The rise of AI-Powered Advice
Big-picture advice and predictive guidance used to be a feature of high-end financial advisory firms — a perk only available to those who could afford it. But thanks to rapid advancements in data analytics and artificial intelligence (AI), that kind of holistic advice is now more accessible than ever. AI-driven robo-advisors can parse many different streams of financial information, delivering customized answers to key questions: Is it time to buy a home, or is it smarter to keep renting? Can I afford to take out another student loan?
Intelligent connectivity powered by AI can anticipate consumers’ needs and next steps, making proactive suggestions that guide them along the path to financial wellbeing. Fintech companies can also help consumers identify when their financial picture becomes too complex for a robo-advisor, and help them find a human financial advisor to meet their needs.
Focus on financial mental health
New investors are quickly finding that the market can be overwhelming. That’s not surprising, financial anxiety is common and studies show that financial stress can have an impact on mental health for some.
It’s not enough for fintech companies to give retail investors access; they also must provide the guidance and support that help consumers manage their financial well-being. Educational tools can ensure that consumers are well informed about their options.
Predictive analytics can anticipate consumers’ questions, serving them key information and insights before they ask. Features that emphasize a comprehensive notion of financial well-being, rather than short-term wins and losses, can also help ensure that consumers are keeping their eyes on the bigger picture.
Gamification for good
The surge of gamification apps has done an impressive job making investing as engaging as playing a video game or joining a social media platform.
Much of the current use of gamification emphasizes short-term thinking, but there’s also an opportunity to help consumers think more broadly about their overall financial picture. One example is peer benchmarking, a feature that enables help consumers to see how their financial habits compare to those of friends and fellow consumers.
Gamification can also be used to incentivize making smaller, smarter choices — for example, rewarding saving over making an impulse buy.
The future of fintech is about more than just broadening access to the markets. It’s about making sure more individuals have access to the tools that can help improve their financial well-being—in the ways that suit their own circumstances and needs. The potential to act within their own set of individual priorities, with their long-term financial wellness in mind is much more empowering to a consumer than simply relying on short-term, high-risk investments.