The scenario is not a new one. Established financial institutions are slow to embrace new technologies. Their reticence is costing them dearly as they lose customer confidence and market share to a bold, tech-savvy generation of challengers. The seemingly simple solution – to seize on innovation – isn’t quite so simple in a sector that’s necessarily risk-averse.
Gary Bond is CEO of TISAtech. He has held numerous roles across fintech and financial services, including as CIO and Head of European Change for Fidelity International, as well as senior positions in Venture Capital firms. As TISAtech, Gary works to accelerate the adoption of fintech innovation in financial services by benchmarking, improving, and connecting fintechs with the financial institutions that most need their solutions.
Here he shares his thoughts on how to ‘de-risk the high-risk’ innovation in financial services.
There’s no going back as technological change accelerates and transforms financial services forever. As the FCA reports, “…there are signs large banks’ historic advantages are starting to weaken, driven by digital innovation and changing consumer behaviour.”
If institutions and innovators can’t come together more effectively, we risk the future of whole businesses – and even financial innovation itself.
A blockbuster future
It’s a Catch-22 situation. The big institutions need innovation to survive, yet they are inherently innovation averse. Innovation, by definition, means something new, unproven and disruptive. Established finance sees anything that’s new, unproven and disruptive as an existential threat.
Challenger financial services are completely free of the legacy mindsets that hold their competitors back. Everything is new, nothing is set in stone. Risk – or more accurately, an unencumbered desire to make things better – is the adrenalin that pumps a challenger’s heart.
Why have inconvenient branches, endless forms and infuriating checks when a smartphone and the latest fintech solutions will do it all better? Customers are providing the answer, with the number of Brits owning a digital-only bank account trebling from just 9 per cent in pre-pandemic 2019 to 27 per cent in 2022.
All things remaining equal, traditional finance is doomed: destined to go the same way as the high street video rental shop. Institutions that have graced Threadneedle Street for centuries will vanish, to be replaced by web properties and apps with no vowels in their names. It might seem far-fetched, but tell that to the shareholders of Blockbuster.
The contagion may spread. In failing to run with the extraordinary wealth of innovation coming from emerging fintechs, the danger is that it will be denied a market. Risk aversion may not only kill off the big banks, but it could also starve fintechs of the oxygen of investment. It really is a case of ‘innovate or die’.
Bridging the confidence gap
Institutions are effectively being asked to gamble their reputations and potentially vast sums on tiny, grass green, micro-funded companies that could go belly up in a week. The innovation itself might be a game-changer, but the company could be badly run, not have the staffing or finance to deliver, or a host of other unknowns that haunt a big bank risk assessor’s dreams.
The fact is, though, that many of these technologies obviously work because they’re transforming the sector – the secret sauce that’s driving the meteoric growth of new players.
The missing piece here is confidence. What we need is to find a way to bridge the gap between ‘risky’ innovation and ‘de-risked’ adoption. As you’d expect, action is needed from both established institutions and fintech innovators.
The innovation mindset
Let’s start with the financial institutions. Given the plethora of regulations that surround them, wariness is understandable, admirable and essential. They do not, however, have to charge headlong into organisation-wide innovation to benefit from it – but they will have to change mindsets, from CEO level down.
Untested innovation in core services – where risk is most pronounced – is likely to be avoided. This still leaves scope for widespread innovation in non-core services that provide customers with the fintech enabled services they so clearly like. We can already see this taking hold in some – but certainly not all – of the big retail banks. The reality is, there’s plenty more room for calculated risk-taking in non-core services.
Innovations within core services aren’t off the books either. Financial institutions benefit from a free-of-charge testbed that they can tap at will: the challenger banks themselves. Keeping a watching brief will help the big banks to evaluate fintech solutions in real-time – adopting and adapting rapidly maturing solutions once they have proven themselves.
Time for fintech to prove itself
Speak to any fintech innovator and they’ll almost certainly tell you that their greatest frustration is trying to sell to a tier-one financial institution. They jump through all the hoops and then hit the risk assessment brick wall. All that time, money and energy is wasted.
That is unlikely to ever change, so the answer is to avoid tier one and focus on tier two.
Successful implementation in tier two, as we’ve already seen, is the real tier-one testbed. Prove themselves here and the risk assessment wall might not seem so impregnable.
Big banks are wary of the unknown, so fintechs need to be more transparent. While a six-month-old start-up can’t show three years of accounts, it can demonstrate its financial responsibility. While it can’t provide multiple case studies, it can demonstrate real-world user experiences from beta testing. The list goes on: the more a financial institution understands, and is reassured by what it sees, the less likely it will say no.
Setting new standards
Add the requirements of financial institutions and fintechs together and we can see that there’s a need for a new set of standards.
Agreed benchmarks mean fintechs understand current capabilities, their relative maturity when compared to others and the actions and tools they need to make the grade. Above all else, a fintech can prove to potential customers and investors that they and their solutions are business-worthy and market-ready.
Similarly, financial institutions can use standards to quantify the risks of partnership. It gives them access to a database of companies that have reached a minimum (though high) requirement, allowing them to: make informed decisions; introduce innovation earlier, and better meet customer expectations.
The only way to square the circle – and de-risk high-risk fintech – is to adopt agreed new standards – building the confidence that unites institutions with innovation.