Long reads

Why consumer demand is at the heart of fintech innovation

Paige McNamee

Paige McNamee

Senior Reporter, Finextra

The ability of incumbents to innovate with the agility of disruptors has long been perceived as an uphill battle with unmatched opponents clambering to take lead position. Alex Bannister, director of strategic partnering at Nationwide Building Society, argues that rather than being borne strictly out of competition, the best innovation comes from looking to where demand lies and acting upon that need.

“I believe innovation is found in the gaps between adjacent industries and technologies. Borrowing from new areas to solve problems on your own is often the most successful way to encourage innovation.”

Instead of looking narrowly toward professional services for insight, Bannister explains that customers play a key role in building momentum for innovation. “Put simply, our members have a fundamentally important role in helping us deliver the products and services they need and want [...] I believe all organisations should work with their customers when developing new products and services so they can help shape and design propositions that are really relevant to their needs.

“While we have been first to market a number of times, Apple Pay, 24/7 customer service via social media and internet banking to name a few, for us it’s more important to focus on delivering things that our customers need, want, and will get a real benefit from.”

The status quo occasionally needs a reset

Bannister goes on to discuss the difference between understanding the needs of consumers and the most efficient means of delivery. While incumbents may have entrenched levels of trust and reputational strength, disruptors aren’t burdened by legacy systems or the potentially poisonous bureaucratic lags that come with large institutions.

He explains that disruptors have a huge role to play. “Some fintechs set out explicitly to collaborate and not all fintechs set out to challenge the banks. Indeed, many remain content to leave highly regulated core functions to the traditional players. In this sense, ‘collaboration’ is a rational response from market players seeking to address market scale quickly – or conversely, test and access tech quicker than they could otherwise develop.”

He explains that this also represents the maturation of fintechs. In this category, they compete less with the banks, more with well-established big financial services tech players like FIS, FICO, and Experian, who would indeed consider themselves the original ‘Fintechs’.

In conversation with Finextra Research, Tom Graham, managing director in Banking at Accenture UK, continues that standalone brands have driven these new ideas: “Regardless of how successful they will be, you cannot ignore the intellectual inheritance neobanks have delivered to the broader industry – new ideas and ways of operating products.

“Banks must keep pace with these changes and customer demand to stay relevant - and sustain their top-line revenue growth. Opportunities such as open banking and novel digital propositions which are ignored in this space will increasingly materialise as strategic threats.”

Banks have sought to collaborate with firms to help them achieve this, therefore encouraging efficient sharing of knowledge to mutual advantage helping to tackle common challenges.

Bannister believes where innovation is concerned, trust and collaboration are inextricable: “When talking about money and people’s finances, trust in an organisation is also a key factor. This is where established providers can bring real benefits to their carefully selected partners. For me, innovation is all about bringing together the right partners and the right people to deliver for the needs of our members.”

Change begets progress 

Olivier Guillaumond, global head of ING Labs & Fintech, ING Bank says: “Innovation should create a differentiating customer experience. It’s the only way to stand out from competitors. Innovation is not about gadgets. Banking should be personal, instant, relevant and seamless. Customers expect that nowadays.

“Consumer expectations are changing. The world has been changing through technological developments at a quickening pace over the past few years and (partly as a consequence) consumer behaviour.

“Consumers are used to instant satisfaction and excellent service. People expect banking to be like that. Covid, like any unexpected massive rapid change brings both threats and opportunities in a context where the speed towards digitisation is accelerated. Definitely an attractive ground to generate ideas with high level disruption potential.”

However, while there is that knee-jerk reaction for traditional players of rejecting technology incumbents from the financial sector, banks must remember Uber, Airbnb and Amazon and their success, and dramatic disruption on their respective industries and beyond. From these seismic shifts we now have Amazon Pay, Amazon Prime and Uber credit and debit cards demanding attention for the market share they are expertly carving out.

In addition to this, while challengers might not be making a similar profit in comparison to big banks, it must be noted that large institutions are reportedly seeing their revenues slashed as a result of the emergence of neobanks.

How to ride the collaboration wave

Speaking with Finextra, Olivier Guillaumond, global head of ING Labs & Fintech, ING Bank, says that “partnerships are great win-win opportunities. We learn about agility, creativity, entrepreneurship, while we offer the fintech a strong brand, a large client base and financial expertise.”

Bannister bolsters the point, arguing that “it’s inevitable that collaboration increases as although there will be core capabilities which incumbents will want to build themselves, the opportunity to partner to bring innovative solutions to customers, or in our case members, at a quicker pace and more efficient cost will not be lost.”

Guillaumond goes on to explain that partnering with a fintech is a means to an end. Success metrics are agreed upfront and the fintech team at ING “closely monitor and step up efforts to increase success and performance of the partnerships. We’ve stopped 95 partnerships to date, fail fast is a crucial innovation principle.”

Craig Fox, director of fintech at Silicon Valley Bank (SVB) concurs, insisting that “partnership is the way forward because there is a great opportunity for banks, who have historically not been at the forefront of technology, due to legacy systems or otherwise, to learn from those fintechs who have technology at the core of their business.” He explains that whilst SVB is a bank that supports the tech community through its specialised industry expertise and its established network, its core competency is not software development in the way it is for certain fintech companies.

“The era of partnership and collaboration is definitely here. It’s fostered by the environment in the UK where we have champions of the fintech sector such as the Bank of England and the Treasury, alongside government schemes, such as CBILS and more specifically the Future Fund, aimed at supporting the innovation economy through the pandemic. Covid has in fact helped to accelerate the awareness among banks that they should look to the fintech ecosystem to support their needs in areas such as digital production and product development.”

Are two heads truly better than one?

The rapid demise of RBS’ ‘flanker brand’ Bó is the perfect example. After rejecting initial proposals to purchase Monzo, the bank chose to compete directly with the London startup to help customers better manage their finances.

Yet by March 2020, a mere six months after its launch RBS announced it would combine Bó with its SME-focused brand, Mettle. Commentary at the time said that the crowded nature and maturity of the UK’s digital banking market meant Bó was always going to have a difficult time. In the five months it was online, Bó attracted just 11,000 customers (including ‘friends and family’ of the bank).

Commentary also pointed to problems plaguing Bó’s tech stack, with a post launch bug and a compliance glitch frustrating users and concerning RBS investors. In this light, financial institutions may find it easier to invest in or acquire a startup that has already built a digital platform that works efficiently rather than attempting to build their own – all the while having to juggle the pre-existing cost of maintaining their legacy systems.

This does not eradicate or dilute the fear of Big Tech corporations making waves in the financial sector. Large financial institutions may opt to partner with the likes of Google, Amazon and Facebook, as seen with Apple’s credit card launch with Goldman Sachs and Mastercard and Google collaborating with Citibank to introduce consumer bank accounts.

How financial players stand to benefit

Deals such as this would ensure that traditional banks have access to a colossal amount of customer data, enabling them to leverage this information to produce products and services that efficiently serve the customer.

Again, this seems to have been fruitful in Asia where Standard Chartered have teamed up with China’s Alipay to launch a digital remittance service using blockchain technology, in addition to partnering with mobile payments arm of Globe Telecoms GCash that allows people to send money between Hong Kong and the Philippines.

In addition to partnering, other banks are deciding to unveil new strategies and therefore, new products and services that diversify their portfolio. This in turn allows them to reach more customers. For example, the Royal Bank of Canada started offering services that help register a startup or rent their house on Airbnb.

Banco Santander also launched a crossborder payments system based on blockchain and BNP Paribas introduced Hello Bank, which have seen success but other thought-to-be innovative initiatives have not been so lucky.

An example of this could be UBS which closed its automated online investment service SmartWealth after launching a robo-advisory service in 2016. However, it remains to be seen whether this will emerge as a trend or is just an indicator of the appetite for investment and the Covid-19 fallout is likely to expose new victims.

For more in-depth coverage of the state of fintech, you can download Finextra’s Future of Fintech report here.

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