Banks are still taking a hammering, having become pretty unpopular since the credit crisis began six years ago. Now they have a new problem to worry about with hot, young and well funded startups, starting to eat away parts of their territory. Is it time for the established order to up the fight or wave the white flag?
Betterment, eToro and Square are all names most of us have heard of in financial circles. They lead the way in a growing list of fintech firms that have left ‘being new’ behind and started to become part of the recognised order in finance. Amongst the leaders of the field, threatening to put their older competitors out of business.
Meanwhile, older and more experienced banks and investment firms face constant criticism from both internal and external factions; asking why, with significant funds and expertise at their disposal, they can’t offer their customers similar innovation to companies with less than a year of operation under their belts.
“building simplified digital experiences, especially in financial services, is critical to institutional survival”
It might be argued that it’s hard to turn a supertanker around, where a speedboat can pivot into attractive propositions in a heartbeat, though this has already been challenged by a team of a dozen individuals at Citi who successfully developed the Citi iPad app within a huge organisation, on a tight deadline and with limited resources.
Other major banks have constructed a variety of innovation teams to change the pace of development, comprising of internal resource and external agency suppliers. HSBC, Citigroup Ventures, National Australia Bank, Standard Chartered, American Express to name a few.
Still though, there’s something lacking. Perhaps it is because many see the banks that have existed for years as now somehow tainted. Or perhaps the reality is that we’re programmed to side with the new, making us more open to innovation from entrants to the market.
There is ever more potential for such an environment as an enormous degree of trust, built sometimes over hundreds of years, has been lost.
That is why many are asking the question if it is time for banks to seek opportunity in startups by ramping up their investments, rather than try and compete in a race some say that they cannot win. The pace and quality of change faster, cheaper and better outside of the company than in.
Huge startup funds from banks, a way forward?
Illustrating a way forward for collaboration without direct involvement was the creation of BBVA’s $100 million dollar startup fund in 2013. The Spanish bank, stealing a march in innovation by aiming to invest in some of the finest talents in pushing the boundaries of banking, while equally providing themselves with a route to integrate technology into their traditional and long established business.
Unsurprisingly, it was BBVA who stole the headlines recently with a $117 million dollar acquisition of four year old Simple. Bradley Leimer wrote an interesting piece about the deal and how it will progress both BBVA’s and Simple’s propositions.
Both of these developments illustrate one thing, and that is a faith in the ecosystem to deliver. As Leimer writes, ‘building simplified digital experiences, especially in financial services, is critical to institutional survival’.
Trying to achieve this within complex and established organisations, too used to doing the same thing, is harder than providing a blank sheet of paper to someone with new ideas. An aggressively forward-thinking organisation like BBVA appears to understand this.
Of course, it is over-simplistic to distill the distinction between success and failure down to a matter of user experience but what startups lack in capital requirements and infrastructure, they make up for in beneficial naivety, crucial to creating new ways of working (without letting the past and the boundaries shape the future). Naturally, experience is improved by taking a fresh perspective on what can be left out as a result – delivering that all important simplification.
Fintech funding beyond
Whether banks follow suit from BBVA or not, the flow of money to fintech businesses will likely continue to strengthen, evidenced by former Visa president Hans Morris forming Nyca Partners to specifically invest in financial technology ventures.
For this pace of investment to continue, emerging firms will increasingly have to evidence solid proof of progress in the real world. This places a necessary burden of success that is mandatory with the continuation and evolution of funding.
In truth, closer collaboration with established banks at an early stage is widely becoming considered as the best way forward. Regardless of where the money comes from, this presents an opportunity for both parties to sharpen models and benefit from reciprocal experience and innovation.
In an ideal world, banks would support this by having direct venture funds or investments with experienced VCs and an open minded approach to what is possible – and how it might apply to the many elements of finance, rather than being solely focused on large scale retail banking and investments.
With such an approach, the next big thing in money might just surprise us.