One of the Fintech reports doing the rounds right now is that by Deutsche Bank, titled “FinTech 2.0: Creating new opportunities through Strategic Alliance”. There has been quite a lot of noise about the Deutsche Bank Fintech 2.0 paper across the social media spectrum, so i thought i better check it out. In short, Deutsche Bank are saying that it is time to collaborate with fintech companies rather than trying to compete with them. Please check out the FinTech 2.0 paper for full details – but in the meantime, the following captures what i think are the main takeaways.
1. Financial Innovation – New Opportunities
- Digitalisation and tech innovation are transforming financial services
- Together they enable interoperability, simplicity, increased customer data – all of which offer new opportunities for providers, and most importantly an improved customer experience
- So, what has enabled these new opportunities:
- Simplifying payments and billing
- Mobile payments
- Enhanced security
- Growth of cryptocurrencies and the peer to peer transfers
- Exploration of blockchain technology
- Updating legacy systems
- Migration to digital platforms that can respond to real time demands
- Customer demand for digital channels and real time / anywhere products
- The ability to improve efficiency and reduce costs
2. Fintech Companies & Digital Ecosystems
This section is quite interesting coming from a “traditional” bank, and well worth a read (page 5). All of the above opportunities have given rise to:
- Financial technology companies or Fintech’s
- Deutsche Bank explain how Fintech companies are particularly honing in on payments
- The fintech companies focus on technology, and use the technology to provide niche financial services or improvements to one particular part of the transaction process
- By focusing on niche products and or services Deutsche Bank highlight how Fintech’s are “identifying, improving upon and competing with existing products within banks’ value chains”
- The end result is an improved customer experience, which is faster, simpler, frictionless and cheaper
- Digital Ecosystems
- Deutsche Bank describe digital ecosystems as marketplaces that deliver entertainment, advertising and retail platform services to merchants and consumers
- These guys (for example Amazon) are looking to improve their customers experience while they visit their “digital ecosystem” and that means simplifying and securing their end to end transaction processing – of which payments is one important element
3. Fintech: Disruption → Collaboration
- Deutsche Bank describe how 1 out of 3 payments start-ups will fail within the first 4 years – but recognise that growing consumers demands cannot all be met by incumbent financial institutions
- At the same time, there is massive fintech investment, estimated at just over $12 billion in 2014, and growing
- But fintech companies, according to the Deutsche whitepaper, provide only a partial solution or product which needs to be integrated into an overall end to end solution
- The above has resulted in some soul searching
- Fintech companies should think about “collaboration rather than competition”
- Banks should think about which parts of their business they need to protect, and which parts should consider partnering with fintech companies
- Clearly partnerships between Fintech companies and incumbent banks and financial institutions offer benefits to both parties. With
- Banks being able to provide market experience and regulatory knowledge
- Fintech companies providing innovative digital services to banks
- Overall shared risk and cost, while at the same time making the most of each others core competencies
4. Why Aren’t Banks Innovating?
The Deutsche Bank Fintech whitepaper outlines the following reasons:
- Regulation
- In short, banks are investing loads to ensure that they comply and adhere to new standards for reporting, anti-money laundering, anti-fraud and Know-Your-Customer requirements
- Various regulatory demands are making it more expensive for banks to do business, which is resulting in reduced funds for innovation
- Differences in the way in which regulation is applied across fintech companies and banks results in a uneven playing field – particularly for banks
- Culture
- In a post-2008 era, the appetite for innovation among banks is pretty low!
- The bank product lines tend to operate in silos, which is quite different to fintech companies – who break away these silos and work best and more freely in an open system / cross product line environment
- Fintech companies aren’t held back by regulation, and complicated legacy systems
- Customer demands
- Simplification, real time, integrated platforms, accessible, personalised and intuitive are some of the factors that Deutsche Bank outline as key customer requirements
- Corporate demands
- Corporates are demanding new and innovative products, and not simply accepting what the banks provide
- The challenge is that corporates dont want to work with fintech companies directly, and turn to banks to play an intermediary role and as a result take on the counterparty risk
- Many national payment systems are ancient and do not support low cost, data-rich processing in real time – this is an area that Deutsche Bank believes fintech companies can effect change
- 2 challenges that fintech companies have, particularly in the B2B space, is acquiring a broad customer base and scaling up their solution for mass market adoption
5. Let’s get married
Clearly Deutsche Bank are advocating partnerships and collaboration between banks and fintech companies. The following outlines some recommendations on what to think about when you’re considering such a partnership:
- Focus on what you do best – your core competencies
- Fintech companies – innovative mindset, nimbleness, responsive to market and customer needs, technological know-how, a bridge between bank and the customer
- Banks – experience, a solid infrastructure, process, financial, treasury and regulatory knowledge, trust, familiarity and reputation (hmm!) and finally global reach
- Complementary core competencies that address a specific demand
- Continuity and a commitment to one another
- Long term business goals
- Consider the type of partnership between the bank and Fintech
- Ensure consideration of the long term roles and responsibilities
- This is something Deutsche Bank go into in a bit of detail. They call it “mindset alignment”, basically banks need to compromise and understand that:
- Digitalisation takes time and can set banks apart from one another
- Business models will change, and some products may be cannibalised
- There will be failures
- A strong vision is required
- Banks will need to improve the way in which decisions are made and how they get stuff done
- This is something Deutsche Bank go into in a bit of detail. They call it “mindset alignment”, basically banks need to compromise and understand that:
- Technology:
- Legacy systems need to be overhauled
- Systems and processes need to be interoperable
- API‘s need to be embraced
- Data needs to move from being unstructured to structured