Three years ago fintech startups thought they were coming to eat banks’ lunch, but today the two are frenemies that acknowledge each side needs the other to stay in business.
Silicon Valley gave Wall Street a brief ego trip by bringing new technologies like blockchain and machine learning that could “revolutionize” the banks. But even though banks are more open to cross-sector collaboration, they still maintain that they understand the business of finance better than anyone.
“The narrative has changed but it does creep back every once in a while,” said Mary Harman, a payments strategy executive at Bank of America, at the Swift Business Forum in New York Wednesday. “We whipsaw on whether fintech is friend or foe… we’re distracted by legacy issues and regulatory compliance issues.”
Now that banks are catching up on the technology side, they’re learning that technology isn’t the problem to be solved, commercialization is. “We don’t innovate for the sake of innovation” has become their mantra as they’ve learned they can’t get swept away by the mere idea of innovation, they’ve gotta stay focused the business.
Here are three things the industry has learned from that process.
When not to innovate
Sometimes banks have to trade agility for standardization, sometimes it goes the other way around.
Banks can innovate fastest if they do so alone, but if they don’t have clients or customers to actually transact with, the innovation becomes pointless. That’s why involving a network of other industry players is so crucial — but getting many different entities to agree on many different things is bound to slow down all organizations involved.
“[Consensus] becomes the interest of the individual versus the greater good, and how we manage that drags the process along. It takes time and effort to get through legacy,” said Michael Bellacosa, global head of payments and treasury services at BNY Mellon.
Plus, it’s usually more important for institutions to keep the lights on and bump innovation down on the list of priorities.
“There are a lot of legacy services that make organizations a lot of money,” said Sean Rodriguez, faster payments lead at the Federal Reserve Bank of Chicago. “They’re well known, well run and profitable. If you look at them and say you’re gonna change all that, you have to think: how fast do I really want to do that?”
Approach startups as vendors, not partners
It takes long enough to bring a handful of banks to consensus. Technology startups in financial services now exist to speed up various processes, but adding in more participants can be distracting too. Banks need to focus on providing a business solution to a client or customer, and not on the hierarchy of relationships as institutions try to maintain the status quo.
“‘Is fintech a threat to banking’ is a very narrow part of a much wider discussion,” said Mark McNulty, global clearing and financial institution payments head at Citi. “Sometimes there’s way too much focus on the threat. This is just about partnership opportunities, about leveraging a vendor.”
By approaching startups as vendors instead of “partners,” one financial firm could even find a partner in another. For example, Citi recently launched a partnership with Nasdaq, that links the bank’s business payments services to Nasdaq’s blockchain platform — all made possible by Nasdaq’s use of blockchain startup Chain’s distributed ledger technology.
“This is an opportunity where fintech being deployed in another realm of the industry for settling another type of transaction still needs payments first,” McNulty said.
Don’t be a know-it-all
Financial organizations have to break themselves out of the silos they’re so used to working in, in order to evolve and become more nimble, which is essential in an environment where the technology underpinning the business develops so quickly.
For BNY Mellon, that kind of thinking began in its innovation centers, where it has been able to take its business development, operations and technology employees, put them together with third parties and push client problems to see what it could solve.
“When you’re embedded in the same things everyday, you don’t think of it the same way and usually don’t get that fresh outside look that allows you to be a little bit more nimble,” said Bellacosa. “I get very different perspectives and you can usually get to a solution you never would’ve thought you’d get if you didn’t attack it that way.”
Although, bankers have to be wary of catching “bright shiny object syndrome.”
“It has been a problem for a while across our industry,” said Citi’s McNulty. “It takes a lot of discipline to really focus on problems as opposed to technology.”
