Innovation = Ideas + Execution + Adoption
– Jag Randhawa
Because Fintech startups are nimble, innovation and execution happen to be their key strengths. However, driving adoption could be a challenge for them.
In the early days of Fintech startups, most of them pitted themselves against traditional financial institutions as the new kids on the block and they positioned to disrupt the financial sector. It could be observed however that years have gone by, yet most of these financial institutions remain strong while several Fintech startups have come and gone.
Nonetheless, a new generation of customers referred to as the millennials are offering a glimmer of hope and a potential customer base and traction for Fintech startups. This new generation of customers have a different expectation of financial services on the basis of speed, simplicity, and convenience.
In offering services to this new generation, the traditional financial institutions are challenged, no doubt. The reason is because some of them have some cumbersome internal processes that stifle innovation. In addition, within those institutions, the internal bureaucracy could be frustrating for their internal champions of innovation who try to think differently and also dare to explore new horizons. As a result, the priority of their internal information technology team is usually more of maintaining legacy systems rather than exploring new frontiers.
The fact remains though that the realities and expectations of the new generation of millennial customers cannot be denied, with executives having to cope with them not only as customers but also as members of their workforce. The reality is that the old ways would not suffice in servicing the new generation.
In theory, the needs of both Fintech startups and traditional financial institutions provide a perfect meeting point for collaboration. In reality however, this can be very difficult. Most intended partnerships are marred by issues such as bureaucracy from the established financial institutions, distrust from Fintech startups, and a cultural clash.
Nevertheless, there have been significant collaborations in recent years, which offer lessons on models by which Fintechs and traditional financial institutions can work together. Such collaboration models are in areas such as:
- Service provision
- Bundling as a value-added service
- Technology licensing
In this model, a Fintech which has developed an area of core competence goes into partnership with a traditional financial institution to provide its solutions as a service. This service can be used to improve the internal process of the bank or provide solutions to serve its client base better.
An example in Nigeria is that of local payment processing startup who has been a payment processor for one of the top leading commercial Banks. Other commercial banks are also considering a similar model.
Outside Nigeria, in the United States specifically, DemystData, an American-based solutions provider to financial institutions has worked with a large Philippines-based bank to expand credit products to customers with zero to little credit history. This partnership has helped in making the bank’s verification of their customers’ risk assessment quicker, by analyzing external data for better decision making.
Bundling as a Value-Added Service
In this model, the product of a Fintech company is integrated with that of the partnering financial institution. This product is then made available to existing customers who may need them or it is used as a unique selling proposition to attract new customers in the case of exclusive partnerships.
An example of this also exists in Nigeria between another Nigerian Fintech startup and a commercial bank, in serving the latter’s small and medium scale customers. The bank’s 3-in-1 bundle offer makes it possible for a small business to have a website, a cloud-based accounting solution, and an online payment system for e-commerce powered by the Fintech startup.
In this model, the Fintech startup offers its proprietary technology to a traditional financial institution for use. This can then be used to improve an existing product or released as a new product.
An example of this is the deal by TD Bank (a top Canadian bank), and Moven, a US-based digital-only bank. This deal gives TD Bank the exclusive rights to Moven’s money management application in Canada and the United States. This led to the launch of TD MySpend, the first application of its kind in Canada. By 2017, about 1 million Canadians had signed up on the app to track their spending habits and gain greater control over personal and family finances.
An evidence of its adoption by a younger generation of customers is shown by the data on customer usage. 25% of app’s active users are between the ages of 18 and 25 while 33% of them are between the ages of 25 and 35.
In this model, a Fintech with a niche specialty works directly with a financial institution to build new products and services for its customers, and in some cases, they jointly build an entirely new product for the market.
Another approach to this that is becoming highly popular is by financial institutions opening up their programming interfaces (APIs ) to developers. This serves as a testbed by which individuals and startups can access the bank’s data and infrastructure to develop innovative solutions.
An example of this model is that of Auka, a Norwegian Fintech that has worked with almost 70% of Scandinavian banks as of 2017 to launch mobile payment solutions. While German financial giant, In this model, Deutsche Bank has opened up its API (called dbAPI) to give third parties access to its proprietary developer environment in order to test their ideas using anonymized banking data. This then offers a path to full-scale product development for solutions that have the potential to scale.
It is also not unusual for traditional financial institutions to acquire Fintech startups in the developed economies such as the US and the UK. This helps the traditional financial institutions to gain outright ownership of the technology of Fintechs and access their expertise. With this, talented resources of Fintechs are transitioned to become internal team members of the acquirer, depending on the terms of the deal.
Beyond the need for innovation, customer acquisition, and growth, driving collaboration between Fintechs and traditional financial institutions has become a major way of accelerating the provision of scalable solutions to those that are financially excluded.