Recent moves by banks to engage more with fintech start-ups are steps in the right direction – but there’s a lot more to be done if they wish to accelerate their take-up of innovative technology.
That was the message that came through from a sparky panel discussion at the inaugural Financial News and WSJD Fintech Conference, where bankers, venture capitalists and innovators shared views on what stops banks and start-ups from working well together.
Udayan Goyal, a founder of fintech investment and advisory firm Anthemis Group, said: “We have this sort of problem that needs to be solved, which is finding the optimal way for the large institutions to engage with the small institutions. I think we are starting to find the road to a solution. We are not quite there.”
Initiatives by banks in the burgeoning fintech sector continue to grow. Banks, some of them centuries old, hope that working with start-ups will help them innovate at a time of rapid technological change.
Some of the boldest institutions, such as HSBC, Santander and Sberbank, have earmarked funds to invest in fintech start-ups, while others, such as Barclays and Lloyds, have launched or backed accelerator programmes.
James Stickland, director of innovation investments at HSBC global banking and markets, said HSBC had made various changes aimed at speeding up its intake of innovative technologies aside from its new $200 million venture fund. This includes an internal acceleration programme, as well as teams dedicated to helping external technology providers find the right people to work with.
Stickland said the bank needed to have “the relevant point people so that you can actually transverse the difficult organisations that we are and find the right stakeholders with the right need at the right time”.
The bank has recently hired a new group global head of innovation, he said.
Ben Green, head of innovation at Santander UK, used an analogy to explain why banks needed to open up to external fintech innovators. He said engineering the right innovation ecosystem was similar to picking the right people for a dinner party.
Green said: “You can actually save yourself a hell of a lot of time by doing that analysis up-front and making sure that you do have the right combination of people to create the kind of value that you’re after.”
While this new inclusive attitude by banks is welcomed by fintech providers, they say there is a long list of issues that need to be tackled: from the “in-house is best” mentality in IT departments to navigating the long and complex procurement process.
Banks have traditionally preferred to build much of their technology in-house, which makes it harder for external vendors – especially young companies – to persuade IT managers that their product is worth buying and not building.
Michael Schmidt, chairman of fixed income start-up Algomi who spent nearly a quarter of a century at big European banks, told the conference: “The problem is the egos, the egos in banks, that is really the problem.
“You don’t get over IT because they continuously think they can build it themselves. I sat on the other side, so I had this argument all the time.”
Another challenge frequently faced by start-ups is finding their way through the bank’s procurement maze. Kirk Wylie, chief innovation officer at open-source risk management company OpenGamma, said his company had often struggled getting approval from the procurement department after the deal had been signed off by the business division.
He said: “I have been in a number of meetings where the business has actually been shouting at their own internal procurement team and the process still takes months longer from there.”
A survey published in June by research firm MRops on behalf of PR firm CCgroup showed that more than 75% of all IT investment decisions in large financial institutions involve up to 20 people, with 15% involving 50 people or more. Many acknowledged that one of the biggest barriers to wider collaboration was the cultural gap between large and small organisations.
Samad Masood, programme director at Accenture’s FinTech Innovation Lab, said the cultural misunderstanding went both ways, and start-ups must also understand and prepare for the fact the sales process will necessarily be long and sophisticated.
Masood said: “Often it means that you need to be a bit more sophisticated in your sales approach and understand what is it that they are struggling with and how you can bring them on to your side and take them down a journey.”
Many suggested that the cultural clash might be overcome by creating separate divisions, or “sandboxes”, where banks could be more free to explore new projects and engage more rapidly with external innovators.
Louise Wilson, co-founder of peer-to-peer platform Abundance Generation, said the gap might be bridged if banks listened more attentively to their consumers and tried to go “back to basics”, and make more common sense-based decisions.
She said: “If all of us could take our everyday approach to life into our highly structured, bureaucratic organisation, you would find that by embracing what is now everyday technology in our business world we could get there much more quickly and everyone would benefit.”
Another challenge banks might face in seeking to engage with fintech start-ups – especially those that have launched venture funds – is that their investment could make it harder for the company they have backed to win business from competing banks. This might make it difficult for bank venture funds to attract the brightest start-ups, said Goyal, who said a start-up taking a bank investment might be “selling its soul to one bank that becomes its one customer”.