In this guest post Jonathan Quin, co-founder and CEO of World First, explores how established financial institutions and newer fintech disruptors stand to benefit from collaborating with one another in the fast-moving financial services sector.
The financial services sector is in the midst of a revolution. The sector has evolved at an astonishing rate over the last decade, inspiring some of the fantastic innovations that the post-crisis financial industry was in desperate need of.
From the introduction of contactless payment to the birth of crowdfunding, fintech disruption has brought about game-changing innovation that consumers across the world have bought into in their droves, demonstrating that financial services is beginning to work better for the people it serves. Most impressive of all, the recent speed of change we’ve seen over the last few years shows no sign of running out of steam any time soon.
As with all industries experiencing digital disruption, incumbent players are often hesitant to embrace new operators and the fintech sector was no different. Initially, high street banks and the established financial institutions of old were dismissive or, even worse, aggressively competitive towards fintechs. However, over time, we’ve seen an attitude shift, with the value of disruption being recognised. As a result, a growing urge for traditional banks to work with new providers has developed.
It’s been interesting to see how the buzzword has changed from ‘disruption’ to ‘collaboration’ within a year, as banks realised that it was better to be a part of a process than to risk being completely disintermediated. I learnt this lesson when setting up online foreign exchange trading at Citibank in the early 2000s, where our mantra was “anything that gets between the customer and the product will be disintermediated”.
In my view, collaboration in our sector goes far beyond a buzzword. It can – and should – deliver value to all involved, most importantly of all the end consumer.
In many instances, banks are limited in their ability to provide the specialist, agile solutions that their fintech contemporaries can. Cost and time are key factors here. The banks need to prioritise spending and resources on their core and most profitable products. The development of products that only service parts of their client base, or are less profitable, may never be prioritised, whereas fintech start-ups may be able to cost-effectively produce solutions for these markets.
These are usually layers on top of existing functionality, as the start-ups probably won’t have the firepower needed to replicate the infrastructure of banks – and nor do they want to. As I’ve said before, no one wants to rebuild the bowels of banking. It’s too expensive and not what those of us who founded alternative companies generally aspire to do.
Through partnerships, banks and fintechs are able to develop the propositions that they would struggle to achieve alone. Customers in return benefit through access to flexible, innovative products (and potentially those which are more bespoke for certain client groups, for whom the banks just can’t justify developing solutions). Customers receive industry leading technology and service, all under the security of a well-known brand.
Having said this, it is important that progress is not made for progress’ sake and that collaboration isn’t purely ‘cosmetic’. In order for such partnerships to really succeed, incumbents and innovators alike must ensure that collaboration makes sense from both a strategic and commercial perspective.
A recent example is the relationship between Santander UK and US-based online lender Kabbage. The pair teamed up earlier this year to speed up the underwriting process in order to offer businesses access to funding within a matter of hours. The process for SMEs to obtain funding is clearly one that could work better, and this new partnership should go some way in addressing the issues around this.
Similarly, World First launched a partnership with Harrods Bank earlier this year to power their new international money transfer service. The new service allows Harrods Bank’s customers to benefit from the advances we’ve made in foreign exchange so that their international money transfers can be easier, swifter and cheaper. We’ve even seen situations where one disruptor partners with another to leverage their respective strengths. Virgin Money, for instance, recognised the need for an international payments product, but it wasn’t sufficient for them to justify the cost of building it from scratch, so they partnered with us to offer that.
Such deals demonstrate the potential of heritage brands and fintech disruptors coming together to produce industry-leading services and products. However, despite the progress that we’ve made in recent years, there remain numerous challenges to overcome as we continue to grow and work together.
A key obstacle is the difficulty for both incumbents and innovators to identify the right partners that are compatible to suit both business models and strategic objectives. It is in our nature as a sector to be competitive, rather than seek characteristics that make good partnerships.
When offering white-labelled solutions and partnering with other financial institutions, there has to be a demonstrative need for our offering within the customer base. In other words, each partnership needs to solve a market problem rather than being a “nice to have” relationship.
Having said this, it is also important that the bank partner does not feel that the solution is so important to their product offering that they need to build (or “own”) it themselves. In some cases, that need to “own” the product has led to another evolution of collaboration where the fintech business develops the solution and markets it to the bank, who then decide to acquire, rather than partner with them.
In a recent survey by IDC and SAP, one in five banks said they would consider fintechs as acquisition targets. This is now outweighed by collaboration. The same survey showed that more and more banks see fintechs as collaborators (e.g. as high as 47% of all banks in Italy).
It is important that fintechs collaborating with more established players are able to continue to think innovatively, and keep hold of the disruptive nature that identified them as a key partner in the first instance. At the same time, we also need to have sufficient systems, control and governance for the bank to be comfortable with us as a partner.
Banks must create the environment for such innovation to thrive by accepting the potential risk of failure along with the opportunity for success. This is very difficult, as anyone who has spoken to a board member of a bank will attest. Risk mitigation and compliance trump everything, and while it’s easy to talk of “failing fast” as a virtue, it’s much harder when you know you’ll be the top story in the country’s news if you get it wrong.
Compromise is the key
Evidently, compromises must be made on both sides to enable each other to adapt and ensure the seamless integration of business models, but where we’re able to successfully achieve this, the opportunities are limitless.
I firmly believe that we’re currently in the midst of a fourth industrial revolution that will be typified by continuous improvement and innovation. The most successful collaborations will be those that dedicate significant resources to sustained product innovation and continue to seek out improved levels of service on an ongoing basis. In my view, it will be those with a real curiosity and thirst for innovation who build solid, reliable businesses with profitable business models who will be the true winners.
As banks start to offer APIs as a way for external companies to interface with their core systems, I think we will see a new wave of collaboration where the fintech provider can provide a service without the bank needing to justify bespoke integration. This is when we’ll really see technology disrupt every aspect of money and financial services as we know it.
If the last few months are anything to go by, I’m excited to see where the next few years take the industry and what will come from the industry working closer together.
Jonathan Quin co-founded World First in January 2004. His career before this included two years as Head of Business Development within the Financial Markets division of RBS. Prior to that he was at Citibank, initially as a trader before moving to the bank’s global corporate sales desk. He then looked after the European sales of Citibank’s online FX trading products. Jonathan holds a law and accountancy degree from the University of Edinburgh.
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