With banks in a headlong dash to digitalise, accelerators, hackathons, demo days and tech challenges – not to mention investments and acquisitions – have become standard tools in an effort to imbibe the spirit and the know-how of fintechs.
According to a recent poll from The Asian Banker, 82% of regional banks now have a firm ‘fintech strategy’ in place.
But, even with broad consensus on the direction of travel, the best route to take is less agreed upon.
On this point, last month’s Seamless summit in Singapore, offered a welcome dose of clarity.
First, the ‘chrysalis’ model, a top-down, inside-out, approach that strives toward wholesale, seamless transformation of the bank into an organisation boasting the technological potential of a fintech with the financial capacity of a bank.
This model is underpinned by serious R&D investment and patenting as banks seek to carve out niches of market control.
It is an approach not without its disadvantages. How easy is it, you might wonder, to fundamentally change a corporate culture, to incorporate new fields of digital expertise, or adapt the layers of legacy systems, from IT to treasury, built over decades?
But then each route seems to possess its own unique challenges. The ‘collaborate/partnership’ and ‘acquisition’ models are built by banks seeking to partner with, and acquire, fintech operators. Partnering and investment is a path favoured by two-thirds (66%) of regional banks.
Plugging in the specialist ready-made platform of a fintech can be an alluring option for banks seeking to quickly build out their digital solutions. But, challenges may arise in the efforts to integrate new technology. Shareholders will be seeking assurance that long-term value can be assured, and unless exclusivity clauses are agreed upon with the fintech, any gain in value may soon begin to dissipate.
Finally, the ‘incubator method’ is a model where banks foster fintech talent from within, bringing it to a point of market readiness. Its value lies not just in the full ownership of new innovative platforms, but also in cultivating a set of internal skills and culture honed around innovation, which can offer long-term rewards beyond the horizon of a single product launch.
Like each of the three options above, though, there are risks attached. Nurturing new and unproven businesses can be a lengthy process exposed to the risks of loss as well as financial gain.
In spite of the different approaches, there are shared priorities most banks recognise, according to the panel.
First off, the importance of getting advice. A union of any sorts is a challenge. Combining together two businesses of such different sizes as a bank and a fintech with their different infrastructures and work cultures can only benefit from the input and experience of advisers who have overseen such corporate partnering before, in banking or other sectors.
Secondly, changes which do occur should be driven from the top. Wholesale reform such as that described by the ‘chrysalis’ approach, or indeed by the three other routes, demand direction and exemplary action from the C-Suite. Only this can give the level of persuasion needed to make the systemic adjustments required.
Lastly, the focus for banks and their fintech partners must be on prioritising the customer. An obvious point, perhaps, but one that may slide in importance as the new efficiencies and cost-savings of, say, replacing humans with chatbots or robo-advisory, become apparent.
The future of finance is clearly digital. But, by whatever means a bank and a fintech join forces, it is worth remembering that customer value, as the panel roundly agreed, is what sustains a business over the long term.