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Fintech: Wave of opportunity? Or tsunami of chaos?

Bank-startup collaboration seen likely to keep all parties high and dry

Bank tech trends can make your head spin. So regularly longtime Tech Exchange Editor John Ginovsky does his best to “make sense of it all.” Bank tech trends can make your head spin. So regularly longtime Tech Exchange Editor John Ginovsky does his best to “make sense of it all.”

The financial technology investment wave continues to accelerate, promising greater opportunities, more cost-effectiveness, and most importantly, improved customer satisfaction.

At the same time, however, this wave can be seen as more of a tsunami, threatening to swamp today’s banking leaders with too much information, too much disruption, and too much potential for indecision.

Dire warnings

First, the troubling observations.

Says Everest Group, in a recent report: “If banks do not get their act right, they might soon lose their relevance.”

The consulting group points to evolving consumer preferences, macroeconomic and regulatory pressures, and increased competition from nontraditional players—i.e., fintech startups. More specifically, it calculates that there has been a 10% compound annual growth rate in the banking business process outsourcing market.

“Consumer preferences are evolving fast, and banks need to align themselves with consumers’ desires,” says Anupam Jain, practice director at Everest Group. “The consumer wants their financial partner to be integrated with their daily life and to be easy to access. They want real-time advice based on their own transactions and behavior.”

This sentiment resonates with another recent survey by Blumberg Capital, a San Francisco-based early stage venture capital firm. Under the heading “Are Banks an Endangered Species?” it found that three of five Americans believe that their banks are failing to keep up with their needs in today’s connected world.

Some of the results of this survey sound familiar: 70% embrace digital banking, online lending, and so forth; 65% believe fintech firms level the playing field by providing services previously available only to the wealthy; 69% think the latest tech for financial tools will help everyone be better off financially.

“Between the negative headlines and American’s general distrust of large financial institutions, banking as we know it must and will change,” says David Blumberg, founder and managing partner.

Banks get it (already)

Other surveys and studies convey the sentiment that many financial institution leaders likely already share: “We know, we know, but…”

Just a few observations from various sources:

• Protiviti’s survey found that “the complexity of digitization and limited technology budgets in many organizations still remain significant barriers to the rate of adoption.”

“Technology leaders are working to optimize limited spend across business initiatives that will potentially add more value to the enterprise, while they are still tethered to information platforms that consume the majority of budgets (55%) for lights-on operational and maintenance initiatives and are allocating only 13% to innovation,” it says.

• The Boston Consulting Group, looking at leaders of large firms of all types, found that the imperative to transform is clear, but not all are following the right transformation path. Instead, it said, firms should “transform their approach to transformation.”

“It is not enough to make partial changes—nothing less than a fundamental transformation of the business is needed if an organization is to achieve positive change over time,” the group says.

• TransUnion research indicates that two in three lenders feel that data and analytics are evolving faster than their own internal capabilities to handle them. More than half say it is difficult to discover useful insights when there is so much data, yet 70% of lenders do want direct immediate, self-service visibility into their analytics.

“Our research found half of lenders say their organizations are driven mostly by intuition and the experience of managers rather than by analytics. Yet 80% of lenders believe that improving their analytics capabilities would make their organizations more competitive,” says Steve Chaouki, executive vice-president and the head of TransUnion’s financial services business unit.

Even the Community Depository Institutions Advisory Council to the Federal Reserve Board of Governors, in its latest meeting report, expressed related concerns. While lauding the potential that innovative technologies offer, it notes that “the risk aversion among regulatory agencies can be reflected in costly requirements that outweigh the advantages of innovation. It is essential that the banking industry and its regulators work together to avoid this Catch-22. Otherwise, innovation will occur outside or around insured depositories, not in them.”

Alliances, not confrontations

Which leads to the start of a way out of this quandary—partnering with fintechs, instead of trying to compete with them.

SAP, in collaboration with IDC Financial Insights, issued a report where the firm says that six in ten global banks are open to partnering with fintech firms. SAP polled 265 retail and corporate banks in 24 countries to determine exactly how they are driving their digital transformation.

Further, one in three are open to a collaboration with a fintech company and one in four would consider an acquisition.

“The relationship between banks and start-ups is an interesting and nuanced one,” says Rob Hetherington, global head of financial services, SAP. “Banks are in the midst of digital transformation, looking for ways to speed their time to market and to deliver new value or services to customers. Start-ups, on the other hand, are mobile, agile, and built solely for the customer, yet they lack the regulatory know-how and customer confidence that large, global banks have. Both have something the other wants.”

In sheer numbers, interest in collaborative fintech investing has grown and likely will continue to grow. Celent notes that in 2010, 60% of North American investments went to disruptive fintechs, and 40% went to collaborative fintechs. In 2015, that flipped, with 60% going to collaborative fintechs.

“Fintech startups are changing the nature of banking. New innovators are setting the trends, often raising the bar for what ʻgood’ looks like,” says Stephen Greer, Celent analyst. “Investors are jumping at the opportunity to fund these ventures, excited by the immense potential.”

KPMG, while also excited about the potential of fintech investments, noted a slowdown this year, due mainly to the uncertainty around the presidential election.

“However, there is growing enthusiasm related to M&A, IPOs, and liquidity, and expectations are that while Q4 may be relatively lackluster, 2017 should see fintech gaining momentum again,” says Anthony Rjeily, KPMG’s U.S. Financial Services Digital leader.

Specifically, KPMG says corporate venture capitalists are acutely interested in the development/evolution of such technologies as the internet of things, artificial intelligence, blockchain, and big data.

The outlook is also rosy from the fintech point of view. Juniper Research estimates that fintech platform revenues to support lending and financing are set to reach $10.5 billion globally by 2020, doubling the $5.2 billion expected this year. Leading the way in this area, says Juniper, are advances in peer-to-peer lending, crowdfunding, and the deployment of next-generation analytics platforms.

Which way to jump?

So, what are bank leaders supposed to do now? In a recent address, Michael Araneta, associate vice-president, IDC Financial Insights Asia/Pacific, ticked off this list:

• Build a new ecosystem of partners in the industry.

• Support industry-focused developers and create innovation communities.

• Respond to new customer segments that do not separate banking from other activities in their everyday lives.

• Embrace partners in an era of unprecedented collaboration.

• Break down the barriers to ideas and innovation within the institution, realizing that change does not come only from the top.

Which resonates with something Jerry Silva, research director for IDC Financial Insights, in the earlier report, says: “Digital transformation at any bank always begins with an honest self-evaluation involving many questions that touch upon evolving customer demands, strengths, weaknesses, and the competitor landscape. From there banks must then invest in a full digital transformation by building board-level involvement, build a leadership structure for organization-wide transformation, and finally build an infrastructure that supports partnerships.”

As always, it is time to sink or swim.

Sources for this article include:

Are Banks An Endangered Species? Survey Shows That Majority Of Americans Believe That Traditional Banks Aren't Keeping Up With The Times

Banks Turn To Technology, Outsourcing In Fight For Relevance In New-Age Market | Press Release

Innovation Quarterly: Latest In Fintech Innovation Q4 2016

Digitization Competing For Limited Technology Spend As Organizations Struggle With Operating And Maintenance Costs, According To New Benchmarking Survey From Protiviti

Fintech Platform Revenues For Lending And Financing To Exceed $10 Billion By 2020, Driven By Social Media And Crowdfunding

IDC Reveals The New State Of Technology In The Financial Services Industry

U.S. Fintech Funding And Deal Volume Continue To Fall In Q3: KPMG & CB Insights Report

Newsbyte: Six In 10 Global Banks Open To Partnering With Fintech Start-Ups

Record Of Meeting Community Depository Institutions Advisory Council And The Board Of Governors

Two-Thirds Of Lenders Struggling To Keep Up With The Evolving Data And Analytics Landscape

John Ginovsky

John Ginovsky is a contributing editor of Banking Exchange and editor of the publication’s Tech Exchange e-newsletter. For more than two decades he’s written about the commercial banking industry, specializing in its technological side and how it relates to the actual business of banking. In addition to his weekly blogs—"Making Sense of It All"—he contributes fresh, original stories to each Tech Exchange issue based on personal interviews or exclusive contributed pieces. He previously was senior editor for Community Banker magazine (which merged into ABA Banking Journal) and for ABA Banking Journal and was managing editor and staff reporter for ABA’s Bankers News. Email him at [email protected].

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