By Monica C. MeinertWhen the wave of new fintech startups burst onto the scene several years ago, announcing themselves loudly as disruptors of the banking industry, bankers rightfully worried. How would these new players affect day-to-day business? How would they be received by customers? And, importantly, how could banks keep up with the pace of the competition?
Time and reality have since set in, and the tone of the conversation has shifted away from “compete” toward “collaborate.” Banks increasingly see the value of capabilities developed by fintech firms, and those companies in turn are becoming better acquainted with the challenges of regulation and other barriers to bringing their products to market.
There have been wakeup calls on both sides.
“For the startups, it turns out it isn’t just the regulation that’s hard—people’s interactions and relationship with money is really weird, and it’s really hard to shift,” observes Jason Henrichs, managing director of the FinTech Forge—an organization devoted to helping financial institutions and startups navigate the fintech landscape.
For banks, the wakeup call has been the realization that customers are coming to value—and expect—a frictionless banking experience. And if banks can’t provide that kind of frictionless experience, Henrichs says, they’ll turn to alternate solutions.
That being said, banks have two key advantages over fintech companies, he notes: the strong relationships that they have built with regulators, and an existing customer base. “That’s why the second wave of fintech innovation…is very focused on ‘how do we serve the banks?’”
With more fintech players now coming to the table as willing partners, banks that have innovation strategies in place will find themselves better positioned to gain a competitive edge. “The best bank perspective on this is that fintechs aren’t their main competitor now,” notes ABA VP Steve Kenneally. “Their main competitors are the other banks that are using fintech better than they are.”
“Some banks are going to thrive in this new era—they’re going to use technology to hit well above their weight class,” Henrichs adds. And it’s not just big banks that will thrive—community banks stand to gain a significant competitive advantage by leveraging technology. Henrichs describes a $2 billion bank he worked with recently that has taken advantage of technology to expand operations beyond the geographic bounds of its six branch network, proving that “you don’t have to be big to be thriving in this.”
Keys to building a successful fintech strategy
1. Adopt the right cultural mindset.
First and foremost, the bank must have an appetite for innovation. “If you change your culture and your mentality around how you’re going to partner with [fintech companies], there’s a real opportunity to remake your business,” Henrichs says.
For some banks, this may involve a shift away from viewing fintech companies as simply third-party vendors or service providers, and instead as collaborators working side by side to develop something new.
At U.S. Bank, for example, the bank’s research and development team has taken part in various fintech accelerators, through which they work with early stage fintech startups. “We’re actually participating in mentoring these companies and helping them frame what they do so that they can have a partnership with banks that will meet our security requirements or our compliance requirements,” explains Dominic Venturo, U.S. Bank’s EVP and chief innovation officer.
Innovation has become a strategic priority for U.S. Bank; Venturo leads a dedicated research and development team that is responsible for exploring new technologies, trends and applied innovations. In just two years, Venturo says he and his team of three employees (together with partners across the organization) have looked at offerings from around 700 fintech companies, resulting in about 30 products in pilot phase and three that have made it successfully to commercialization.
When approaching a new potential fintech player, Venturo says, “we always look at: what is their objective, what is management trying to accomplish and how does it fit with our strategic goals and principles?” From there, the bank makes a decision on whether to partner or compete.
Innovation doesn’t come without its fair share of risk, however, which can hinder some banks from jumping into a new partnership with both feet. “Institutionally, we don’t love to say ‘it might not work and we’ll have to go back to the drawing board,’” says Henrichs. “That’s why it’s important that it starts with the C-level.” He adds that part of the mindset shift is acknowledging that eliminating all risk in innovation just isn’t realistic. “It’s not about risk elimination. It’s about putting a plan in place to both monitor and respond when that thing we tried doesn’t work exactly as expected.”
2. Do something.
For bankers that are uncertain about where to begin, “the next best thing to do is to have some focus on doing anything. Do something,” Venturo advises. “You can study forever, but at the end of the day, if you want to get anything done, you have to move from study to do.”
And size isn’t an excuse to sit back and wait, Henrichs adds. Rather, it’s about choosing an area of focus that makes sense for the bank in terms of available resources. While that may not always be a big, sexy innovation, banks can start by achieving smaller, incremental change—something as simple as building and beta testing a new email delivery system can help build up the bank’s “try and fail muscle” and help lay the groundwork for future, larger-scale projects.
“I would encourage a bit more of a bias for risk and action to say ‘let’s stretch just a little bit,’” Venturo says. “If you’re doing a fitness routine and you do the same thing every day, your body gets normalized to it and it doesn’t actually get any better. But if you stretch a little bit every day, it begins to say ‘I need to adapt to that.’ You’ve got to start somewhere.”
3. Be forward-looking.
Consumers’ demands are shifting every day, and new products will continue to hit the market at an unrelenting pace. Knowing that, bankers must be able to keep an eye on the horizon.
It doesn’t take a crystal ball to make some educated guesses about what the future holds, Venturo adds. “You can look at things that are predictable trends”—such as societal shifts, demographic changes, spending changes and others—to piece together a forward looking view of what’s ahead. “Payment tokenization, digital identify and security, remote authentication…are all going to become critically important” in the days ahead, he notes.
While some trends will be foreseeable, bankers must still leave room for—and be willing to embrace—uncertainty, says Henrichs. “The most interesting problems to be solved are the ones that are actually not as well characterized, and that requires a shift in how we think about our product development, our processes and our technology.”