There are various ways for financial institutions to benefit from
advanced technologies and business models provided by so-called FinTech's. For
those still hesitating to make the step, one approach is to start collaborating
with FinTech's that help them in a non-intrusive, incremental way thereby
limiting business risks. For those who are more bullish, taking stakes in handpicked
FinTech companies will be the way to go, albeit riskier. Whichever way,
collaborating with Fintech’s will drive transformation and accelerate change.
The Bank - FinTech collaboration is the way to go
Whereas most of the early
FinTech talks spurred fears of so-called imminent disruption, a change in
mindset occurred in 2017 as most FinTech's realised that the shortest path to
revenue generation is to partner with banks rather than compete against such
established and trusted institutions. Over the last 2 years, multiple deals
between banks and FinTech's have been announced demonstrating not only the
viability but also the strategic importance of such collaboration. In the
payments space, examples include Standard Chartered Bank’s and Santander’s
investments in blockchain-based global payments network Ripple. In trade
financing, examples include HSBC’s stakes in TradeShift and Kyriba as well as
DZ Bank’s and DB’s stakes in TrustBills.
Whilst such
"collaboration" comes as a change vs. the early days, it is actually
not new at all. Financial institutions have been using third-party software
solutions for the last 5 decades. What is really new with FinTech's is that
incumbent institutions can now easily take advantage of very advanced ways to
drastically improve or, when desired, to re-invent their businesses. The “FinTech
– Bank” deals led by some banks aim at taking bold moves to deliver serious growth
opportunities. Making it happen is however easier said than done. Let's focus
on execution.
Options for banks to work with FinTech's
To keep it simple, let’s consider two
collaboration options as per Figure 1:
·
Option 1 - Incremental. In this first prudent
approach, banks take advantage of FinTech propositions to improve or extend
their existing and proven business models. Benefits for banks include
incremental product enhancements, increased operational efficiency, reduced
costs and improved user satisfaction. In this case, FinTech propositions are
usually software solutions introducing technologies that co-exist with legacy
systems. Collaborating with such Fintech's is low risk given the absence of
impact on existing business models and practices. Also, as some FinTech
technologies integrate very smoothly in legacy environments using non-intrusive
IT techniques, short time to market is to be expected on top of earlier listed
benefits. This first option offers a path to major efficiency increases and
product enhancements whilst minimising risks.
·
Option 2 - Radical. In this second approach, banks partner with
FinTech's who have invented and own a new business model. Banks do this when
they realise important changes in client expectations and behaviours are
happening and that business practices are being disrupted by Fintech's. In
order to embark on such FinTech adoption path, banks need to have a bullish
ambition (1) to get into new markets such as additional geographies and/or
underserved client segments and (2) to embark in new business models and
practices (e.g., joining a market place). Such FinTech platforms usually aim at
connecting all participants involved in complex business transactions, so as to
enable specific features such as auctioning, multi-banking, escrow service,
title registry, transaction tracking, ... Assuming the bank's risk appetite is
as high as the RoI of the prospective opportunity, banks will consider taking a
stake in their chosen FinTech partner. This helps them be part of the
governance and benefit from growing valuation of the FinTech company itself. It
sometimes offers dividend payments as well.
Figure 1 illustrates both
"Incremental" and "Radical" options whilst Figure 2 provides more details on key differences between both approaches.
Figure 1. Path to Bank – FinTech collaboration
The majority of financial institutions being risk
averse, they favour taking an incremental approach which is described above as
the low-risk Option 1. Figure 2 outlines key differences between both options:
Figure
2. Key differences between both FinTech adoption options
Given the strategic importance of the matter,
some banks started to industrialise the "Radical" approach. A recent
example is Standard Chartered Bank's new business unit called SC Ventures which will lead digital
innovation across the Bank, invest in FinTechs companies and promote rapid
testing and implementation of new business models.
As Michael Gorriz Group Chief Information
Officer of Standard Chartered Bank said: “As new technology continues to
play an ever more important role in banking, there is a huge opportunity for us
to promote more innovation, and at the same time develop and deliver digital
solutions that work for our clients and for us.”
Whether favouring the Incremental or Radical
approach, one business area where such Bank – FinTech collaboration delivers
tangible and immediate benefits is related to Data Management. As Alec Ross, Futurist and Author puts it
in his recent book: "Data is the raw material of the information
age". Financial institutions that fail to take advantage of their client
transaction data miss a huge opportunity to match emerging client needs. They
ought to understand that data represents a new type of economic asset feeding
top management decision making. As the nature of innovation is changing, data
becomes a decisive factor in the success or failure of businesses.
The new ITFA FinTech will guide you through the FinTech landscape
At a Board Meeting which took place in September 2017, the ITFA Board identified the future
impacts of FinTech innovations on the receivables space and decided to set up
the ITFA FinTech committee.
The ITFA
FinTech committee is starting its activities in Q1 2018 and will organise
educational opportunities for ITFA members to discover the various options to
take advantage of FinTech propositions. The potential FinTech impacts on
payments and trade finance are expected to be huge, so information on new
technology options, improvements in business processes and new business models
are paramount for transaction bankers to face the wave of change.
Resourced
with representatives from FinTech companies and banks, the ITFA FinTech
committee will act as a neutral forum for the ITFA membership to keep abreast
of FinTech innovations impacting the trade finance and risk distribution spaces.
It will focus on four key market-level themes: Collaboration, Platforms,
Infrastructure and Data.
We hope the
ITFA FinTech will become a venue for the ITFA membership to debate common issues
and grow their understanding of FinTech propositions impacting the trade
receivables space. A FinTech panel as well as other educational opportunities
will be available at the ITFA 45th Annual Conference that will take
place in Cape Town between 4-6 September 2018.
Members of the ITFA FinTech committee
ITFA FinTech Committee Chair
· André Casterman, Casterman Advisory
ITFA Board Members
· Paul Coles, HSBC (ITFA Board Member)
· Sean Edwards, SMBC (ITFA Chair)
Banks
·
Adeline de Metz, UniCredit
·
Daniel Rymer, Mizuho Bank
·
Farah Shaikh, Crown Agents Bank
Platform providers
·
Ka-Kit Man, CCRManager
·
Johanna Wissing, LiquidX
·
Markus Wohlgeschaffen, TrustBills
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