A winning FinTech formula: Define, adopt and execute

This past winter, the Financial Services Roundtable arranged one of the best events in recent memory to address the broad topic of FinTech. Their FinTech Ideas Festival assembled an unparalleled group of executives from the largest financial services and technology companies—and, of course, representatives from a diverse group of FinTechs—to discuss and debate areas of technology expected to most impact the financial services industry.

The event was unique because discussions were aided by “futurists” from some of the world’s largest technology companies who prompted participants to think about areas of technology not yet conventional as FinTech forms, but that could alter how financial services are delivered in the future—or what the need for financial services might look like.

And the ideas set forth at the festival were somewhat startling.

For example: Imagine a world where autonomous vehicles are a reality. According to John Zimmer, co-founder and president of Lyft, “the average vehicle is used only 4 percent of the time and parked the other 96 percent.” Using a manufacturing analogy, he argued that you’d shut the factory down immediately at that utilization rate. Now imagine a world where more than 90 percent of the vehicles on today’s roads are no longer needed. What would that imply for the auto finance and insurance industries, as well as auto manufacturing and its supply chain?

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Whether because of autonomous vehicles, the Internet of Things, artificial intelligence or blockchain technology, some established financial services companies may face outright extinction over the next decade. Others will be well positioned to take advantage of the technological evolution of the financial services marketplace. My bet is that in the near term, established financial services companies will continue to be dominant players in payments, cash management, savings and investment, and extending credit.

So while the decision-making pressure on established financial services companies is not as severe as some FinTechs or technologists might want you to believe, important decisions must be made. The experience customers are coming to expect in accessing financial services products and services is undergoing fundamental transformation.

That is where the current state of the FinTech phenomenon comes in.

Defining FinTech benefits today

While the technologies are complex, the current FinTech wave boils down to three simple dynamics: (1) leveraging technology to measure or predict customer need or behavior; (2) meeting customer need through the best customer experience possible; and (3) the ability to execute more nimbly to determine which products or services to deliver and how to deliver them.

Of course, predicting customer need or behavior is achieved through a strong data infrastructure combined with a high-quality analytics function. But what defines the quality of the customer experience?

Technologists at the FinTech Festival argued that delivering the same products through a mobile device does not necessarily constitute the type of experience digital-era customers have come to expect. According to Aaron Levie, CEO of Box, more than 70 percent of millennials say they would prefer to bank with Google, Apple or Amazon if that were possible. The argument is that these companies think first about what the customer experience should be and then design and deliver their products through a modern set of systems and processes flexible enough to evolve quickly to meet changing customer needs and preferences—or simply make the experience better.

At Fundation, we believe that within the financial services arena, the quality of the customer experience is determined by these factors: convenience, simplicity, transparency, intuitiveness and security of the process by which a product or service is delivered. In developing the optimal customer experience, many financial services companies struggle with rigid legacy systems that lack the flexibility required to continually innovate and evolve what products and services are delivered—and how they are delivered.

FinTech’s flexibility factor

The flexibility advantage FinTechs have over traditional financial services companies comes from building their technology infrastructures from scratch on modern digital technology. With in-house application development and data operations capabilities, FinTechs can rapidly engineer—and more importantly, reengineer—customer experience and the business processes.

The capacity to reengineer user interfaces, user experience and back-end processes adds up to power for financial services companies to maintain a competitive edge. The typical FinTech probably has a release cycle every couple of weeks; at most established financial services companies it is materially longer, to say the least.

But at some companies, this level of flexibility can result in consternation. The organizational psychology of many banks considers flexibility (and its cousin, customization) problematic because it requires numerous and frequent decisions—and decisions typically imply risk.

As a result, organizational bias tilts toward buying ready-made software and solutions that do not provide the flexibility to compete over the long term. Think about how many of your current vendors force you to follow their release cycles.

Banks: Well positioned to win with FinTech

Within the consumer and commercial banking sphere, our company is certainly not alone in possessing these capabilities. We could thump our chests, like so many FinTechs, about how we will transform banking. But we see the future differently. The biggest disruption to banking won’t come from outside the industry: It’s going to come from the inside. A handful of banks, maybe more, will reengineer their technology and data infrastructure by using modern systems and processes—developed internally and augmented through highly integrated FinTech partnerships—to create superior returns and increased market share.

Besides the obvious capital cost advantage they have over FinTechs, we believe banks are well positioned for three other reasons:

  • Banks will remain consumers’ leading choice for the most utilized financial products, given their brand strength and existing market share.
  • Banks have far more data than the average FinTech to develop predictive analytics that determine customer need or behavior.
  • Perhaps most important, banks have what we at Fundation call the “trust asset”: the intangible asset that financial institutions have because their customers trust that they will protect their information and privacy and recommend products best suited to their needs.

And finally: No industry (except perhaps the intelligence and aerospace industries) possesses such a sharp focus on cybersecurity as financial services companies. This is perhaps one area where financial services companies should thank regulators for emphasizing.

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Part 2 of the series can be found here.


Sam Graziano is CEO and co-founder of Fundation Group LLC. He previously spent more than a decade in investment banking and private equity, where he developed expertise in strategic, financial and operational issues for banks, specialty finance companies, asset managers, broker/dealers and other institutions throughout the financial services sector.