What is common to Betterment, Lending Club, Paytm and TransferWise? Driven by increasing demand from customers for more personalised, seamless and digital experiences, these are examples of fintechs that have begun to demonstrate their growing significance in the financial services industry, and more importantly, are pushing conventional banks to rethink their strategies. A single-minded start-up, whether in the area of wealth management, peer-to-peer lending, payments or remittances can affect one aspect of banking in an intensely customer-focused way.
On a recent “innovation tour” of Japan, I witnessed one such example. Money Forward, a fintech that started in 2012, today controls the largest share of the market in personal financial management in Japan.
Over 4.5 million users link their multiple accounts with 2,600 financial institutions to a single cloud-based portal where data from past 6 months can be extrapolated to predict the future. A 5-year old fintech firm is transforming how Japanese consumers manage their finances with their stodgy old banks.
The global fintech revolution has benefited from increasing access to venture capital (VC) funding. According to latest available statistics, VC investment in fintech companies reached $13.6 billion (Dh49.9 billion) globally in 2016, up 7 per cent over the previous year. Traditional fintech hotbeds like Silicon Valley, New York, London and Germany are increasingly being rivalled by Australia, Hong Kong and Singapore. Closer home in the UAE where the fintech ecosystem is relatively nascent, key enablers such as technological talent, availability of funding and government support are slowly coming together to support the movement. We are also seeing the emergence of incubators and accelerators such as In5, AstroLabs, The Cribb and most recently Fintech Hive at DIFC. Late last year, we saw Abu Dhabi Global Market, the other international financial centre, launching a “sand box” that allows start-ups to operate under regulations that are possibly less onerous.
Fintechs usually focus on either the first mile or the last mile of the bank-client relationship and create digital alternatives that are more efficient, offering lower cost, more convenience and overall a better user experience. However, most struggle with gaining traction on growing their customer base as well as building a sustainable business model that can be scaled up quickly to achieve break-even before the angel or VC funding dries up.
Responding to the growing interest from the Middle East are a range of regional fintech solutions. According to a recent study, there could be over a hundred fintech companies across the Mena region, with 24 in the UAE alone. Beehive, a peer-to-peer lending platform that connects investors with businesses, Payfort, a payments processor, Beam, a mobile app for payments and Wally, a personal financial management app are some examples of the more successful start-ups in the UAE, though there are many others like NOW Money (banking for the unbanked), Finerd (robo-advisory for investments) and Bridg (electronic payments via Bluetooth) who are in the early stages of launch.
An opportunity for institutions
Against this, it is old-fashioned to think of financial technology companies as competition for conventional banks. Why not bring the best of fintech to banking instead, treating it as an opportunity? If we look at fintech as foes, even as banks follow the traditional approach typical of large institutions, we may need to be prepared for death by a thousand cuts. Conversely, large banks get the best of both worlds by developing a new paradigm that incubates the best fintech out there.
As partners of carefully selected fintech companies, market-leading banks can offer financial firepower, rich customer databases and impeccable regulatory foundations. Financial institutions can then throw their weight behind innovative next-generation products to offer scalability and significant funding.
The engagement model between a bank and a fintech can be one of many: co-innovating through internal labs and hackathons, white-labelling a fintech solution, investing venture capital into a fintech or forming an industry-wise alliance to solve a specific problem.
An innovation ecosystem
How does this ecosystem work? The first step is to create the foundation. In a global example, the Fintech Innovation Lab has brought together professional services multinational Accenture with financial services institutions, venture capital companies and angel investors to foster relationships between start-ups and banks through 12-week mentorships.
The Lab has raised more than $420 million in funding, and counts among its supporters Bank of America, HSBC, Credit Suisse and other banking industry giants. Another example is Ripple which is working with leading global banks to improve international payments using blockchain technology.
In the UAE, Emirates NBD’s Dh500 million commitment over three years to support digital innovation has crystallised in the creation of the Future Lab initiative. Among other objectives, Future Lab works with vendors and partners to conduct research on emerging technologies such as blockchain, artificial intelligence, augmented reality and the Internet of Things while acting as an accelerator for creating viable products. The first digital bank for millennials, Liv., that launched its beta version recently, is one such example.
An open-door policy
An open-door innovation policy implemented at a large bank is necessary to create an ecosystem that is not just open to new ideas, but is also, in fact, a magnet for innovation. The leaders recognise that ideas can come from anywhere and are crowdsourcing innovation from various stakeholders, including staff, customers and vendors. All it takes is to be open to ideas such as an active member of staff wondering aloud why the number of steps they walk every day could not contribute to the interest one gets paid on a savings account. Forward thinking banks can be found at hackathons and tech challenges around the world, being inspired by the ideas that emerge at such events and mentoring them into locally viable products.
As an innovation leader, a bank mentors an idea through its entire life cycle, thereby becoming an innovation incubator. Today, apart from the fintechs, partners like Visa, MasterCard, IBM, Microsoft, NCR and SAP work with banks to take variously sourced ideas to production.
No one has all the answers, but you do need to ask the right questions, the big one being: is this technology possible to roll out in a secure, regulator-friendly way that is also commercially viable?
The institution needs to be aware that some fintech ideas will succeed while others may fail; but that does not shake the underlying commitment to try new things. Because you never know until you try.
Suvo Sarkar, Senior Executive Vice President & Group Head — Retail Banking & Wealth Management at Emirates NBD