Fintech: David plus Goliath?
Large businesses have more to gain from partnering with disruptive start-ups than by resisting them. Start-ups may seek disruption, but they have a lot to learn from co-operation with incumbents
Few sectors have been untouched by digital technology. Even manufacturing and agriculture, amongst the oldest of endeavours, face far-reaching changes from 3D printing to ‘lettuce bots’. One traditional sector ripe for disruption today is financial services. Enabling web technologies like peer-to-peer lending have reduced barriers to entry in finance, and the reputational fall of the big banks, post-global financial crisis, has been coupled with growing consumer interest in alternative brands. Moreover, high fees – especially in international currency transfers and investment management – created openings for new, more competitively priced options. ‘Fintech’ start-ups are making their presence felt, using artificial intelligence, big data and blockchain technologies to deliver new services to customers in innovative ways.
The popular narrative is a ‘David and Goliath’ story of plucky upstarts unseating incumbents and stealing their lunch. A 2015 report by the World Economic Forum put it thus: “Banks and insurers realise an ‘Uber moment’ may finally be coming to their sector, as they face disruptive start-ups that can deploy online platforms, work with small capital bases and make strategic use of data to acquire customers and drive revenue at a fast pace.” Some start-ups have also taken up this narrative: the marketing campaigns of TransferWise, a peer-to-peer currency exchange firm, was blatant in its criticism of cross-border bank charges by major players.
But the reality is more complex, with intriguing alliances and collaborations between start-ups and incumbents, as is symbolized by the view from Ben Brabyn’s offices in London’s Canary Wharf.
Brabyn is head of Level39, an accelerator for technology start-ups. It’s home to a shoal of Fintech businesses, but its neighbors in Canary Wharf include some of the world’s largest financial services companies. The interactions between Level39 residents and these big players are less about disruption, he says, and more about collaboration.
“This word ‘disruption’ fascinates me. Sometimes I think there’s a kind of iconoclasm at play. People are looking for a plucky challenger that will bring the titans to their knees. And it’s a compelling narrative. I get that,” he says. “But what I see when I walk around Level39, meet members and hear what they’re doing, is a fantastic environment where incumbent banks can meet these start-ups that may help them adapt more rapidly than they can do on their own.”
Mr Brabyn doesn’t see established banks as the ‘giants of yesteryear’. He sees them as sophisticated, multinational organizations facing billion-dollar problems that Level39’s start-ups can help them to solve. It’s a huge opportunity for knowledge sharing and mutual benefit, he says.
That’s how Bipin Sahni, head of R&D and innovation at Wells Fargo, a US bank, sees it too. Wells Fargo puts a lot of time and money into R&D, he says, but it’s also meeting, investing in and partnering with start-ups. Through its accelerator programme, it is helping 11 fledgling firms scale up their ideas so that they are suitable for enterprise-class deployment in big banks. In return, Wells Fargo gets an equity stake in these companies along with a close-up view of new technologies and ways of thinking.
“We learn so much from start-ups about how we can build a better experience for our customers,” says Mr Sahni. “And we get early access to innovation – I live for that. If I can work with a small start-up and do a small proof of concept, pilot or prototype and get some early customer feedback on that, then that’s a big win for us.” Incumbents have little to fear from disruption if, with the help of start-ups, they are leading it.
So what are the technologies that start-ups and established banks are keen to collaborate on? At Innovate Finance, a UK-based membership organisation for the Fintech community, CEO Lawrence Wintermeyer has some ideas. Artificial intelligence and smart algorithms top the list, he says, not least for their ability to automate time-consuming administrative tasks, but also for their use in behavioural analytics that help banks spot fraud. Cyber intelligence technology remains a hot topic. And blockchain technologies that could provide banks with tamper-proof records of transactions have captured imaginations. “A year ago, most bankers would have had no concept of blockchain beyond the Bitcoin currency. Now, it’s one of the most actively piloted technologies, with probably a three-to five-year window for corporate adoption,” he says.
What disrupts incumbents most are not technologies but new business models that change customer expectations, believes Andres Wolberg-Stok, global head of emerging platforms and services at Citi and a director at Citi FinTech, a digital lab where employees investigate emerging technologies. “Customer expectation is such today that we at Citi are not going to get compared to another bank. We’re going to get compared to Uber, Airbnb or any other digital service that has figured out how to transform the lives of customers,” he says.
In other words, financial services companies must adjust to a world where most customers carry mobile devices with huge processing power, giving them immediate access to a world of information and services, and ever-higher expectations of all companies. Incumbents must raise their game in response.
“I think it’s because Fintech start-ups take that approach naturally, instinctively, that the talk of disruption is there,” says Mr Wolberg-Stok. “But technologically, the tools that are available to a small start-up are available to the incumbents as well.” When it comes to disruption, joining forces with the ‘sling throwers’ is more fruitful than trying to smite them.
- Incumbents who are willing to team with innovative start-ups can turn disruption to their advantage. In areas such as finance, intriguing alliances between innovators and incumbents are starting to emerge.
- The advantages of collaboration? Incumbents get the opportunity to leverage the latest innovative thinking. Innovative start-ups get the resources they need to scale their ideas.
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