Financial technology (fintech) represents both a great potential for disruption and an opportunity for investment banks. In order to make the most of fintech, banking leaders need to develop a holistic framework that is built on a cohesive innovation architecture and one that utilizes meaningful partnerships and incubation programs.
Global fintech financing has grown rapidly over the past five years. According to Accenture Research, based on CB Insights data, total investment in fintech startups from 2010 to 2015 is estimated at more than $47 billion, with more than $2.6 billion in capital markets fintechs. Investment in trading fintech was roughly at $700 million.
Bank's strategies include venture investment (e.g. Santander InnoVentures invested in Ripple Lab1), acquiring startups (e.g. acquisition of Honest Dollar by Goldman Sachs2), and building innovations in-house (e.g. Citi’s ‘Citicoin’3).
While the initial interest in fintech yielded heavy investment and acquisition on the part of banks, a new trend is emerging. More and more, investment banks are choosing to engage with fintech through collaboration. Many industry leaders are developing incubation programs and looking to joint innovation. For example, Fidor Bank has its own open platform for third party developers.4
This new trend could be characterized by partnerships between established players representing strong brands and startups that can provide platform advances without the need for risky build-outs.
Fintech could offer tremendous opportunities for growth and innovation for investment banks, but that doesn’t mean the road is free of obstacles. There are some inherent challenges that banks need to consider and overcome while meaningfully adopting fintech. These include: restricted budgets due to discretionary spending on compliance and regulation; the growing number of startups to track and evaluate; getting fintech solutions to work in an enterprise model; and legacy system interface challenges.
It is critical that an investment bank incorporates the fintech strategy it wants to deploy into a broader vision of innovation. It could then develop a pragmatic and aligned approach to execute—and in particular in an environment where investment dollars and management time are increasingly scarce. Innovation requires a coherent vision and an integrated master plan. A sound fintech strategy is an important element of this—but only one element.
Designate a chief digital officer to set a comprehensive strategy and build a framework that relies on collaboration from all innovation sources.
Make a sound fintech strategy an element of the overall innovation architecture to drive inspiration and benefit across all departments.
Instead of viewing each innovation in a vacuum, consider a more holistic adoption strategy.
Look to digitally savvy startups for collaboration. They could help established players build platform advances without costly build-outs.
Fintech offers tremendous opportunities for banks, but also comes with a set of inherent challenges that may include funding restrictions and technology concerns. Instead of constantly throwing money at the hottest, latest startups, banking leaders need to find a way to adopt fintech in a meaningful way.
Those that implement a holistic framework, apply various digital technologies in combination, and build creative partnerships should be on track to avoid the fintech money pit and get innovation right.