In the first part of this series, we examined how banks can harness the flexibility and customer-centric technologies FinTech’s possess, while also leveraging existing competitive advantages in brand strength, existing market share and rich stores of data to fuel predictive analytics. In part two, we’ll examine how banks can best execute a sound FinTech strategy, and capitalize on their “trust asset” among consumers.
Do nothing, do it yourself, and two other FinTech-execution strategies
Banks sit in a strong position to win the FinTech revolution—but complex questions about how to execute remain. There are four basic strategies:
Manufacture your own capabilities
Operate as the general contractor aligning your institution with third parties that can do the manufacturing, or
Combine manufacturing and general contracting
For banks predominantly or entirely in relationship-driven lines of business rather than transactional lines of business, the “do nothing” option is viable for now. The pressures on your business are not as severe, and a wait-and-see approach may enable you to make more informed decisions when the time is right.
But for others, that option is fraught with peril. While the technology implementation process will be difficult, what may be harder is the related change in organizational psychology. Resistance to change is natural—and some employees may believe FinTech initiatives pose potential career risk or challenge the beloved status quo. Yet these initiatives are more likely to present opportunity.
That is why FinTech initiatives should be driven top-down. Executive leadership should command these initiatives and set the vision. More important, executive leaders should explain why the institution is pursuing a FinTech initiative and why it has decided to build, partner or outsource. This can reduce the natural resistance to, and fear of, change.
Building FinTech initiatives in-house is hard work but has advantages. It provides maximum control over the project and limits counterparty risk (vendor management). The downside? The skills required to execute are wide-ranging: from project management, product management, software development and quality assurance to managing hardware.
That said, building in house doesn’t mean everything requires proprietary technology. Most FinTech platforms combine proprietary technology with configured, customized third-party components. Should you elect to build off of third-party software, you must ensure the platform is highly configurable and customizable. If you don’t have control or significant influence over customization, you will lose the opportunity to continuously reengineer the processes to rapidly innovate and evolve.
The lack of flexibility to configure and customize represents the single biggest criticism we have of many legacy technology providers to the banking system—and even some of the new software vendors to the industry that built their platforms on flexible technology. Most of these new firms sell pre-packaged solutions (or “managed solutions”) that place limitations on a bank’s ability to customize the way they want to do business. Does buying the same pre-packaged solution as your competitors give you a long-term sustainable competitive edge? Or does it simply provide a long overdue upgrade?
Being the general contractor isn’t easy either, but banks are very adept at it. You could make the argument that most banks consist of various mono-line companies (mortgage, auto, credit card, commercial, corporate, payments, wealth management). If each business line employs different systems (mostly third-party), they already operate as general contractors. The business line leaders we’ve come to know have significant experience managing critical third-party vendors and therefore the skill set and knowledge to manage even the most innovative financial technology partners. What’s more, they often know what they want their operating platforms to do.
Should your institution decide to partner or outsource services to a FinTech, it is paramount to align interests. Both parties must:
Establish shared objectives and measurements of success
Identify and discuss potential areas where interests may not be aligned, and
Focus on driving results that will not happen overnight.
Banks should embrace their FinTech partner as just that: a partner, not simply a vendor. Welcome the flexibility that they offer and allow them to empower your institution to innovate and evolve.
Trust in your ‘Trust Asset’
In a world where Amazon, Google and Apple dominate the digital landscape, deliver ideal customer experiences and may possess a “trust asset” of their own, the status quo is not an option, no matter how painful change can be. If your financial institution intends to compete over the long term, you must execute on a FinTech road map. While potential transformational technologies loom on the horizon, they are unlikely to threaten the majority of financial services providers that facilitate payments; extend or facilitate the delivery of credit; or assist consumers and institutions with managing savings and wealth.
As a result, the near-term decisions will have consequences, but not dramatic consequences so long as financial services companies move toward infrastructures with a foundation of flexibility. Over the next decade, flexibility will allow financial services companies to compete more effectively by delivering the products, services and experiences customers will demand. Flexibilityis what will allow your institution to maintain its competitive position over the long term through the ability to reengineer the customer experience and business processes. And it begins, fittingly enough, with the flexibility and boldness to embrace changes made possible by FinTech and banking’s digital age.
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.
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