Monday 21 January 2019 7:13 pm

Why collaboration, not competition, will digitalise banking

Deborah O’Neill is UK head of digital at Oliver Wyman.
and Martin Robinson

Across every sector, businesses are looking to technology to reduce costs and improve their products and services.

But most big financial services firms simply aren’t set up to create, drive, and wield new tech innovation – certainly not to the degree that a startup can.

Big companies are hampered by legacy IT systems and complex governance that make decision-making sluggish.

While they are shielded to a degree from disruption from startups by their immense scale, broad customer base, and ability to navigate regulation, they also remain slow at designing and implementing digital businesses.

At the other end of the spectrum are the fintech startups, which have been springing up and churning out wave after wave of new digital products with the potential to reshape banking.

They have innovation in abundance, but most are failing to navigate financial regulation and win swathes of clients keen to enjoy a new kind of financial service. Even the UK’s first digital-only banks took years to rack up a million customers.

What’s obvious is that fintechs and big financial services companies hold the solution to each other’s problems. That’s why, when we help companies rebuild their technology from scratch or create a new digital business venture, fintechs always have a role to play.

It would take years to build what a fintech can do in months, and even longer for a fintech to reach the scale of a bank. But such collaboration introduces a suite of new challenges.

For fintechs, they often find the bank can’t confirm exactly if, and when, a contract will start. Worried that the office dog may starve, the fintech approaches another potential client, but mid-way through discussions the bank gets back in touch – they want the project to start: tomorrow.

The fintech is often unprepared and realises the bank is expecting a version of the product that doesn’t exist yet: it’s still in development.

From the bank’s perspective, we’ve seen them get frustrated when the product promised by the fintech isn’t perfect and ready to plug-and-play. In addition, they regularly find fintechs are unprepared or unable to wade through complicated and extensive legal and regulatory requirements.

The secret to successful collaboration between banks and fintechs – businesses so different in terms of size, culture, age, and expertise – lies in the initial phase of the engagement. When we bring together a bank and a fintech, we put additional efforts into managing interactions and expectations.

The most obvious challenge during interactions is the culture shock, particularly if a bank keeps the fintech at arm’s length. It is far better to treat the fintech as a core part of the team, making it easy to create a common language and prioritise frequent, honest interactions on challenges to align expectations.

A common sign of expectations and needs not being communicated comes two weeks into the project: the product is full of bugs or fundamentally incompatible with the bank’s existing IT. To avoid this, fintechs must not over-sell the readiness of their product.

They should have ready a testing environment – a “sandbox” – to quickly try out functionality with dummy data provided by the bank. Both should build this experimental phase into their contracts, with a quick way out if the fit isn’t right.

By cherry-picking the best fintech has to offer, we’ve seen five-year transformation programmes in twelve months, at a tenth of the cost of doing it in-house, and typically reducing operating costs by 70 percent. The fintechs that help deliver such transformations not only gain a major client, but also learn how to better work with any bank on future projects.

The prospect of an increasingly digitalised financial system delivering more of what clients want at lower cost is exciting. We’re looking forward to seeing which big business will be next to fully harness the innovative power of fintechs and become the financial services firm of the future.

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