Defining, Adopting and Executing on FinTech – Part 2
BAI Banking Strategies published this article.
By Sam Graziano, CEO, Fundation
Be the Manufacturer or the General Contractor
Banks are in a strong position to win the FinTech revolution—but what remains are the complex questions about how to execute. There are a few basic strategies: (1) do nothing; (2) “manufacture” your own capabilities; (3) operate as the “general contractor,” aligning your institution with third parties that can do the manufacturing; or (4) some combination of manufacturing and general contracting.
For banks that are predominantly or entirely in relationship-driven lines of business rather than transactional lines of business, option (1) is viable for now. The pressures on your business are not as severe, and a wait-and-see approach may enable you to make more informed decisions when the time is right.
For others, option (1) is fraught with peril. Assuming that you choose (2), (3) or (4), the technology implementation process will be hard, but what may be harder is the related change in organizational psychology necessary to execute on those decisions. Resistance to change is natural, and some employees may view FinTech initiatives as posing potential career risk or challenging the beloved status quo, whereas these initiatives are more likely to present opportunity.
That is why FinTech initiatives should be driven top-down. Executive leadership should command these initiatives and set the vision. More important, executive leaders should explain why the institution is pursuing a FinTech initiative and why it has decided to build, partner or outsource. Explaining why can reduce the natural resistance to, and fear of, change.
Building FinTech initiatives in-house is hard work but has advantages. It provides maximum control over the project and limits counterparty risk (vendor management). The downside is that the skill sets required to execute are wide-ranging: from project management, product management, software development and quality assurance to managing hardware. That said, building in-house doesn’t mean that everything needs to be proprietary technology. After all, most FinTech platforms are a combination of proprietary technology along with third-party components that are configured and customized. Should you elect to build off of third-party software, you must ensure that the platform is highly configurable and customizable. If you don’t have control (or significant influence) over customization, you will lose the opportunity to continuously reengineer the processes necessary to rapidly innovate and evolve.
The lack of flexibility to configure and customize is the single biggest criticism we have of many of the legacy technology providers to the banking system and even some of the new software vendors to the banking industry that built their platforms on flexible technology. While materially better than older solutions, most of these new firms sell pre-packaged solutions (or “managed solutions”) that place limitations on a bank’s ability to customize the way they want to do business. Does buying the same pre-packaged solution as your competitors give you a long-term sustainable competitive edge, or does it simply provide a long overdue upgrade?
Being the general contractor isn’t easy, either, but banks are very adept at it. You could make the argument that most banks are just an amalgamation of mono-line companies (mortgage, auto, credit card, commercial, corporate, payments, wealth management). Within each of these business lines, they employ different systems (mostly third-party systems) and are therefore already operating as general contractors. The business line leaders we have come to know have significant experience managing critical third-party vendors and therefore have the skill set and knowledge to manage even the most innovative financial technology partners. What’s more, they often know what they would want their operating platforms to do, as opposed to what they are built to do today.
Should your institution decide to partner or outsource services to a FinTech, it is paramount to align interests. Both parties must establish shared objectives and measurements of success, identify and discuss potential areas where interests may not be aligned, and focus on driving results that will not happen overnight. Banks should embrace their FinTech partner as just that: a partner, not simply a vendor. Welcome the flexibility that they offer, and allow them to empower your institution to innovate and evolve.
Don’t Squander the “Trust Asset”
In a world where Amazon, Google and Apple dominate the digital landscape, deliver ideal customer experiences, and may possess a “trust asset” of their own, the status quo is not an option, no matter how painful change can be. If your financial institution intends to compete over the long term, executing on a FinTech road map is vital. While there are potential transformational technologies on the horizon, they are unlikely to threaten the majority of financial services providers that facilitate payments, extend or facilitate the delivery of credit, or assist consumers and institutions with managing savings and wealth. As a result, the near-term decisions that need to be made will have consequences, but those consequences are not as dramatic so long as financial services companies are moving toward infrastructures with a foundation of flexibility. Over the next decade, flexibility will allow financial services companies to compete more effectively by delivering the products, services and experiences that customers will demand; flexibility is what will allow your institution to maintain its competitive position over the long term.
Sam Graziano, CEO of Fundation Group LLC
Sam Graziano is a seasoned financial services executive and entrepreneur. He co-founded Fundation in 2011 and is directly responsible for the strategic direction and growth of the company. Prior to founding Fundation, Mr. Graziano spent more than a decade in investment banking and private equity, where he developed an expertise in strategic, financial and operational issues for banks, specialty finance companies, asset managers, broker/dealers and other institutions throughout the financial services sector.
Disclaimer: The views and opinions expressed in this article are those of the author and do not reflect the views of Fundation Group LLC or partner institutions.
Defining, Adopting and Executing on FinTech – Part 1
BAI Banking Strategies published this article.
By Sam Graziano, CEO, Fundation
This winter, the Financial Services Roundtable arranged one of the best events regarding the broad topic of FinTech. The Financial Services Roundtable’s FinTech Festival brought together an unparalleled group of executives from the largest financial services companies and the largest technology companies and, of course, representatives from a diverse group of FinTech companies, to discuss and debate the areas of technology expected to have the most pronounced impact on the financial services industry.
What was unique about this event was the discussions were aided by “futurists” from some of the largest technology companies in the world. These futurists prompted participants to think about areas of technology that are not yet conventional forms of FinTech, but could fundamentally alter the way financial services are delivered in the future, or what the need for financial services might look like in the future. While FinTech may be causing some heartburn in some corners of financial services, the ideas set forth at the festival were somewhat unnerving.
Imagine a world where autonomous vehicles are a reality. According to John Zimmer, co-founder and president of Lyft, “the average vehicle is used only 4% of the time and parked the other 96%.”[1] Using a manufacturing analogy, he argued that at that utilization rate you would shut the factory down immediately. Now imagine a world where more than 90% of the vehicles on today’s roads are no longer needed. What would the future implications be for the auto finance and auto insurance industries—not to mention the auto manufacturing industry and its supply chain.
Whether it is as a result of autonomous vehicles, the Internet of things, artificial intelligence or blockchain technology, over the next decade some established financial services companies may face outright extinction while others will be well positioned to take advantage of the technological evolution of the financial services marketplace. The need for some financial services products will decline or disappear while others will remain. My bet is that we are a long way off from a future where established financial services companies are not the dominant (or a dominant) player in payments, cash management, savings and investment, and extending credit.
So, while the decision-making pressure on established financial services companies is not as severe as some FinTechs or technologists might want you to believe, there are important decisions to make. The primary issue is that the experience that customers are coming to expect in accessing financial services products and services is in the process of being fundamentally altered. That is where the current state of the FinTech phenomenon comes in.
Defining the FinTech of Today and the Benefits of FinTech
FinTech has become a convenient (and amorphous) term applied to virtually any technology and technology-enabled process that is, or might be, applied within financial services.[2] While the technologies are complex, the current wave of FinTech boils down to three simple dynamics: (1) leveraging technology to measure or predict customer need or behavior; (2) meeting customer need through the best customer experience possible; and (3) the ability to execute more nimbly to evolve what products or services to deliver and how those products or services are delivered.
Every reasonably well-versed person in FinTech knows that the ability to predict customer need or behavior is achieved through a strong data infrastructure combined with a high-quality analytics function. But what defines the quality of the customer experience? Technologists at the FinTech Festival argued that delivering the same products through a mobile device does not necessarily constitute the type of experience that customers have come to expect in the digital era. According to Aaron Levie, CEO of Box, more than 70% of millennials say that they would prefer to bank with Google, Apple or Amazon if that were possible.[3] The argument is that these companies think first about what the customer experience should be and then design and deliver their products through a modern set of systems and processes flexible enough to evolve quickly to meet changing customer needs and preferences—or to just make the experience better.
At Fundation, we believe that within the financial services arena, the quality of the customer experience is determined by the convenience, simplicity, transparency, intuitiveness and security of the process by which a product or service is delivered. The challenge for many financial services companies in developing the optimal customer experience lies in the rigidity of legacy systems that impede the flexibility required to continually innovate and evolve what products and services are delivered and how they are delivered.
It’s All About Flexibility
The distinct advantage that FinTechs have over traditional financial services companies is the flexibility gained from building their technology infrastructures from scratch on modern digital technology. With in-house application development and data operations capabilities, FinTechs can rapidly engineer and, more importantly, reengineer the customer experience and their business processes. The capacity to reengineer UI/UX and back-end processes is a major factor in the ability of financial services companies to maintain a competitive edge. The typical FinTech probably has a release cycle every couple of weeks; at most established financial services companies, it is materially longer, to say the least.
In our many conversations with prospective bank partners, we often find ourselves articulating the tremendous flexibility that our platform possesses to accommodate the desired customer experience and the integrations that are required with the systems and processes of the bank. But at some companies, this level of flexibility can result in consternation. The organizational psychology of many banks considers flexibility (and its cousin, customization) to be problematic because it requires numerous and frequent decisions—and decisions typically imply risk. As a result, there is an organizational bias toward buying ready-made software and solutions that do not provide the flexibility necessary to compete over the long term in the digital era. Think about how many of your current vendors force you into following their release cycles.
Banks Are Well Positioned to Win with FinTech
Within the consumer and commercial banking arena, our company is certainly not alone in possessing these capabilities. Armed with these capabilities, we could be thumping our chests, like so many FinTechs, about how we are going to transform banking.[4] But we see the future differently. We believe that the biggest disruption to banking is not going to come from outside of the banking industry - it’s going to come from the inside. A handful of banks (maybe more) will reengineer their technology and data infrastructure using modern systems and processes, developed internally and augmented through highly integrated partnerships with FinTechs. As a result, these banks will generate superior ROEs and take market share.
In addition to an obvious cost of capital advantage versus FinTechs, we believe banks are well positioned for three other reasons. First, banks will remain the dominant choice of customers for the most utilized financial products, given their brand strength and existing market share. Second, banks have far more data than the average FinTech that can be used to develop predictive analytics to determine customer need or behavior. Third, and perhaps most important, banks have what we at Fundation call the “trust asset”; the intangible asset that financial institutions have because their customers trust that they will protect their information and privacy and that they will recommend products best suited to their needs.[5] No industry (except perhaps the intelligence and aerospace industries) is as sophisticated and focused on cybersecurity as financial services companies. This is perhaps one area that financial services companies should actually thank their regulators for emphasizing.
Part 2 is available in the News Section.
Sam Graziano, CEO of Fundation Group LLC
Sam Graziano is a seasoned financial services executive and entrepreneur. He co-founded Fundation in 2011 and is directly responsible for the strategic direction and growth of the company. Prior to founding Fundation, Mr. Graziano spent more than a decade in investment banking and private equity, where he developed an expertise in strategic, financial and operational issues for banks, specialty finance companies, asset managers, broker/dealers and other institutions throughout the financial services sector.
Disclaimer: The views and opinions expressed in this article are those of the author and do not reflect the views of Fundation Group LLC or partner institutions.
[1] John Zimmer, “The Third Transportation Revolution—Lyft’s Vision for the Next Ten Years and Beyond,” Sept. 18, 2016.
[2] Sometimes, even more egregiously, simply having a website and offering a financial product may be considered FinTech.
[3] Commentary from Aaron Levie at Financial Services Roundtable FinTech Festival.
[4] See LendingClub S-1: https://www.sec.gov/Archives/edgar/data/1409970/000119312514435442/d766811ds1a.htm.
[5] According to J.D. Power, 79% of customers say they their “Bank acts in my best interest”