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Collaborative innovation drives higher value for big and small players in fintech
The financial landscape has changed so dramatically in recent years that companies who once saw themselves as competitors are more likely to become eager collaborators, especially when it comes to innovating in financial technology.
Large financial institutions, with their years of experience and access to data and customers, and fintech start-ups, with their agile approach to creating dynamic solutions and financial tools, have learned to leverage each other’s strengths to mutually capitalize on emerging opportunities in the market.
These changing dynamics in the business behind technology was one of the topics discussed at the latest panel hosted by Bloomberg’s Women in Fintech. While agreeing that product development, innovation and marketing are all important issues, the participants took special note of some fundamental changes taking place in fintech’s broad ecosystem.
Leveraging scale and flexibility in fintech
Over the past decade, fintech start-ups have made institutional banks nervous. New financial technology instruments have simplified traditional banking transactions like transfers, payments, personal loans and mortgages, putting revenues at real risk. Some reports have estimated that legacy banks could lose as much as 25 percent of their business in the future.
“Startups are a lot more nimble than large institutions,” explained Julie Shin, head of strategic operations and innovation productivity at Citibank.
They can be more flexible and can easily focus on a single strategic solution. However, they lack the bigger firms’ experience, access to historical data and don’t have the deep pockets necessary to fund marketing and product support, on top of product development.
“But from a risk perspective, they’re making these really big bets that they have a solution that’s going to substitute or complement the industry,” Shin noted.
Larger institutions on the other hand, can face a number of obstacles when they try to innovate, among them legacy IT systems, a culture that doesn’t bend easily, regulatory restraints and even their own size and structure.
At the same time, startups and big banks each have what the other needs, yet simultaneously fall short in some areas. When it comes to innovation, the model Shin likes best is when players large and small “actually work together.”
“You get the benefit of both being large, having access to the information, and a smaller team that’s able to work a little bit more quickly,” she said.
In both the U.S. and Europe, banks and insurance companies are increasingly partnering with fintech startups as a different way to drive change. In fact, a survey by PwC found that 82 percent of banks, insurers and asset managers plan to work with new fintech businesses over the next three to five years.
In addition, changing consumer preferences including easier access and more convenience are driving the demand for advanced technology and improved processes. By partnering with startups, institutions can address issues more quickly, taking advantage of the fresh perspectives and leading-edge technology they may not have in-house.
For example, consider Token, a fintech startup co-founded by CEO and event panelist Melanie Shapiro. Shapiro’s company has developed a wearable “Token Ring” that enables users to securely store essential identity data such as login information, door and car keys, transit passes and credit cards. The technology saves customers the frustration of keeping track of the personal information needed to conduct their day-to-day.
“The prevailing narrative around fintech is that it’s difficult because it’s highly regulated,” said Leslie Campisi, chief marketing officer of Anthemis Group, which invests in financial technology companies. “But I think it’s difficult because of all the emotional juice we have around things like identity and money.”
Partnership in practice
Changes in the way commercial challenges are identified and solved has shifted the relationship between startups and big firms from being one of competition to one of collaboration, Campisi observed.
“What we see in the investment space is not about who’s going to win—the startups or the banks, or the startups or the insurance companies,” she said. Instead, “it’s very much about collaboration.”
Anthemis, she continued, “has always believed in the power of the ecosystem to create a future for financial services where there are no zero-sum games, no winners and losers, but an environment where everyone can win.” That point of view, she suggested, is becoming more prevalent.
For example, when Mercantile Bank of Michigan, a Michigan-based community bank first met with Abe.ai, a Florida-based fintech company, their initial discussions centered on philosophy, not tech solutions. It was really about finding a good fit.
The Mercantile-Abe.ai partnership is a good illustration of Campisi’s point: The companies eventually created a win-win relationship which established the foundation for partnership success. Abe.ai received essential funding from Mercantile to develop its AI-driven “conversational banking” software. And Mercantile – whose aim is to develop a financial product that other community banks can use – gets a piece of the revenue from Abe.ai’s sales.
Campisi also noted a shift in the way startups envision their business path. Today, they’re less likely to think about IPOs as their exit strategy than they are to consider selling to one of the financial industry’s bigger players, or perhaps a tech company that wants to participate in the financial sector and needs a point of entry.
A new focus on engagement
Collaboration’s benefits are evident to both sides. Established financial institutions can cut costs and better meet consumer demands, while fintech start-ups can quickly access new markets and gain an edge over their competitors. At the same time, both gain industry knowledge and support in navigating regulatory constraints.
“Bloomberg is in the unique position of acting as a startup within a large financial tech company. We’ve focused on building a product that the market actually needs. We pause to spend time gathering client feedback with a focus on how they view the optimal client experience. Then we work closely with our product managers and engineering partners to innovate a product that solves the problem our clients have actually asked us to solve,”said Elena Takacs, Head of Americas Sales, KYC, Bloomberg LP.
The takeaway: By forging once-rare relationships, fintech startups and big banks are driving innovation and giving their ecosystem an entirely new level of value.
Bloomberg will host the next quarterly Women in Fintech breakfast on September 20th in New York. If you would like to learn more, email eprise@bloomberg.net.