by Brad Carr, Senior Director, Digital Finance
Customers have increasingly come to expect a higher standard of immediacy and personalisation in the services they use, and the financial industry is no different. Delivering on those expectations is challenging though, and it is here that incumbent institutions and fintech start-ups share an unusual dilemma: how to partner effectively and expeditiously.
Incumbent banks and insurers have substantial customer franchises, often built up over many years. What they often lack is the ability to innovate with agility, hamstrung by a “war for talent” among a scarce supply of data scientists, and contending with aging infrastructures and a risk-averse culture in a highly regulated sector.
On the other hand, start-ups have some of the most innovative thinking, but they lack the customer bases needed to be able to deliver their innovations into the economy. While some will cite the challenges of scale and funding, their bigger hurdle is being able to reach people, especially in finance where customer relationships have been built on trust.
Unsurprisingly, these two groups of firms have come to appreciate the potential value of partnerships, whether in joint ventures, acquisitions or equity stakes, or in vendor arrangements. This is an effective method for getting innovation into the economy, harnessing the ideas of an innovator/incubator, and partnering with someone who has the ability to deliver it to a wide audience of customers.
However, there are some considerable barriers to such collaborations.
In particular, some regulatory requirements for third-party vendor management can be onerous, geared more to an analogue world. And some regulatory requirements are simply incompatible with how a start-up might operate. For instance, where a bank might take an equity stake in a venture, this can extend bank remuneration rules to the venture’s management, effectively imposing bank rules on the start-up world, despite their very different financial models.
In some jurisdictions, it’s not unusual for the onboarding process to take more than a year to get through all the required approvals, when the average US start-up firm is burning through cash at a rate of around $250,000 per month (a recent report by San Francisco-based Brex identified that the burn rate is even higher in internet services and advanced analytics). Requirements for due diligence on providers are valid and critical, but the dynamic technological environment demands new agility in the process.
That is not to attribute all blame to regulation. Institutions’ own processes for onboarding a start-up partner also need greater agility. This will improve incrementally over time, as banks and insurers’ own legal, risk and compliance teams become more conversant with the technologies and of the start-up operating model, and more adept at applying their risk controls to new scenarios.
It is similarly critical that incumbent institutions and their supervisors become more familiar with cloud technology, as a critical enabler that underpins partnered innovations. Fintech startups are typically cloud-native in their nature, developing those immediate and personalised solutions that bank and insurance customers demand, but which can’t be supported by aging mainframes and disparate legacy systems.
It is vital that institutions, start-ups and regulators work to overcome these frictions, and to enable more partnerships to flourish. Not only is it critical for the business models of incumbents and start-ups alike, including of their ability to compete against bigtech firms and preserve competitive marketplaces for customers, but also for the wider economy. Without the reach to a large established customer base, the great innovations conceived within a start-up will wither on the vine, and the economy will miss out on a range of valuable customer-centric innovations. We must work to overcome those frictions and ensure that great ideas can get to market.