E27: BANKS AND FINTECH – AN ARRANGED MARRIAGE BUILT ON TRUST, BUT DOES IT LAST LONG?

Some banks tout happy engagements with tech startups, but how does the “marriage” go when trust, legacy system and security hurdles come into play?

The fintech sector is growing, and fintech players disrupt the traditional banking system with agile and nimble models. They also satisfy new customer demand for speed, efficiency, and a better user experience.

Some banks rock the boat by employing a collaboration strategy, touting happy engagements with tech startups. But how do these “marriages” go when trust, legacy system and security hurdles come into play?

A “marriage” that is sure to happen

Users have started adopting digital services as banks close their physical branches. Shoppers now prefer all-in-one financial services at their fingertips with no extra costs. 

At the same time, entrepreneurs look for easy-to-use and reliable business banking services. Investors are ready to buy, trade and hold neo assets such as cryptocurrencies and NFTs.

These emerging consumer tribes are forcing banks to transform to usher in a digital-first era post-pandemic. They have no choice but to be proactive in cutting down excess baggage in processes, dependency on IT and red tapes that drag transformative initiatives.

“We are seeing fintechs leading the way in the transformation to digital, with banks in general not too far behind,” said Mohan Jayaraman. “Traditional banks will need to double down on their efforts to adopt technology and innovation to scale their digital offerings.” Jayaraman is MD (Southeast Asia and Regional Innovation) at Experian Asia Pacific.

To remain their edges, banks are responding to the heated competition in different ways. According to a Statista survey, while 43 per cent preferred setting up their own fintech incubators, the majority (50 per cent) prioritised partnering with, investing in, or acquiring startups. 

Accelerator programmes, such as Accenture’s FinTech Innovation Lab Asia-Pacific, capitalise on these insights to help startups gain access to and build partnerships with leading financial institutions across the globe.

For the record, e27 listed the 21 tech startups providing services to banks (though not all are fintech). Banks have started adopting cloud, moving into curated open-source stacks, and applying marketing tools like gamification. They are also leaning on advanced technologies, such as artificial intelligence, robotic process automation (RPA) and blockchain from startups as a part of their long-term strategies. This, however, signals hidden hurdles behind the touted happy engagements between these firms.

How much “trust” do they have to maintain the long-term relationship?

Trust is not always in place when it comes to adopting external tech service providers. At an event in 2020, Hung Nguyen, CEO of Vietnam’s TPBank said, partnering with third-party technology vendors was just a short-term solution for banks. His company prefers to develop new products, services and business models in-house.

Alex Graham, a UK strategy analyst, working with PE/VC investment funds and scaleup companies, echoed this view in an article on Total. “For all the wealth and resources that banks have, to rely on fledgling startups to drive the innovation of their industry strikes me as misguided,” noted Graham.

He underlined that this passive response to fintech wastes internal resources of funds and sends “a defeatist message”. Instead, he recommended that banks establish independent innovation lab offshoots. 

These labs would eliminate any internal politics and be staffed with incentivised employees that seek to tackle problems within their current business.

These, however, result in a “buy or build” dilemma that hinders efficient collaborations between banks and tech startups. Perx Technologies shared with e27 that this mindset is presented as some banks think they can create the solution independently. Banks are also advised by a top consulting firm to co-innovate and co-invest in the transformation in the next period.

“Three years later, they are back to square one or nowhere close to where they need to be,” said Amrith Ganesh, vice president (marketing and product strategy) at Perx Technologies. Perx is a Singaporean startup providing customer engagement and loyalty management solutions.

Indonesia’s financial API platform Ayoconnect also finds it challenging for newly established startups to approach and persuade bank clients. “Newly established startups with no track record may find it challenging to convince banks and other financial institutions in Indonesia that they are the right partner for this highly regulated and complex business,” said Jakob Rost, CEO and founder of Ayoconnect.

Ayoconnect and Perx are shortlisted for Accenture’s 2021 FinTech Innovation Lab Asia-Pacific (FILAP)

The goal is not to think alike but to think together

The hesitance to work with tech startups also comes from the fact that most traditional banks are plagued with legacy, heavy bureaucracy and processes.

“For the more established banks, an organisation-wide transformation is a major undertaking, especially given legacy systems in place. It requires investment, time, patience, and stakeholder buy-in,” said Jayaraman of Experian.

A Forrester study commissioned by Experian found that one in four APAC organisations encounters hurdles in increasing credit decisioning and management automation due to legacy technology and systems.

Moreover, national or central banks often require every bank in its country of origin to adhere to legal requirements, restrictions, and guidelines constructed to safeguard their people’s money. This slow down the due diligence process of banks when involving third-party service providers.

With a lot of banks, the IT procurement and compliance department are often outdated. Integration and release plans also have to be aligned across various teams with different priorities and skillsets. 

In addition, banks generally have their apps and want to do tighter integrations by consuming APIs and building custom interfaces.

“These challenges generally mean that even though it’s easy to get started on Perx, launching with most traditional banks takes about six months,” added Ganesh.

Barriers also include concerns over startups’ life span. Startup Genome estimated in its 2019 report that 11 out of 12 startups fail. Harvard Business School senior lecturer Shikhar Ghosh even discovered that about three-quarters of VCs-backed firms in the US don’t return investors’ capital.

“It is not about digitalising for the sake of it but digitalising strategically,” said Justin Hurst. He is the field CTO at US-based cloud computing company Nutanix.

We also have to admit that while it is important to have in-house tech capabilities, leveraging external tech partners is a way to achieve speed-to-market and gain first-mover advantages. A collaborative approach also takes less time for banks to develop new innovative products and solutions, which might not be within their current range of expertise or understandings.

“Companies must understand that technology is no longer the sole differentiator, but it’s the content, business model, distribution, and customer experience that matters,” said Ganesh of Perx. “They should then partner and co-innovate as much as possible to win the crowded war of digital finance.”

The strength of startups is that they create a minimum viable product (MVP) first. They then secure a team that can constantly build, measure, and learn to find the best scalable solution across the larger market.

The following steps boil down to how well banks and tech startups can think together to overcome integration hurdles. This is when backup plans and trials are advised as critical steps for banks before stepping into any long-term relationships with startups.

Hurst also added that the ability of enterprises to leverage existing staff and skill sets — rather than spending time and resources re-tooling or re-hiring — would be critical to ease the migration to new technologies.  

Protect the marriage of banks and tech startups

These fresh partnerships foster data growth from consumer journeys, which requires banks to be alert about some inherent concerns of a data-sharing economy: data security and fraud detection.

According to Boston Consulting Group, a cyberattack is 300x more likely to happen in banking and financial institutes than in other types of businesses. On top of that, an Accenture study in 2019 revealed the average cost regarding data breaches for financial services companies globally touched US$18.5 million per year.

Another Accenture research indicated that consumer trust is eroding fast in banks — only four in 10 respondents (37 per cent) trust their bank to oversee their data, especially with regards to the use of customer data.

“Banks and fintechs will need to urgently strengthen their defences across people, process and technology, with enhanced standards of security hygiene,” said Fergus Gordon, managing director and banking industry lead at Accenture. “If data is the new oil, trust is the new currency.”

In the case of Perx, banks share some amount of customer and transactional data with the startup, but the customer information is anonymised.

“The data collection, if any, is done by the banks and hence the consent for data collection and usage is between the bank and its customers,” stated Perx’s Ganesh. “We follow security measures to protect the data that is eventually stored with Perx on behalf of our clients.”

The growing adoption of technologies, such as AI, has also made this concern more mainstream in the banking sector.

As per an OpenText survey of financial services professionals, 80 per cent of banks responded that they are highly aware of the potential benefits of AI and machine learning. Another report showed that 75 per cent of respondents at banks with over US$100 billion in assets are currently implementing AI strategies. AI can supercharge customer experience by enabling frictionless, 24/7 customer service interactions and bolster better investment and security.

“We are beginning to see vendors being required to provide information on how AI is ethical, transparent and fair, and not biased,” said Adrian Fisher, Asia Head of TMT at global law firm Linklaters. “Banks need to make sure that they are comfortable with feeding a whole bunch of data into an algorithm, which will then be used for other purposes.”

He emphasised a governance framework to report how AI has been working in practice between banks and tech startups. Some guidelines, such as the EU’s General Data Protection Regulation (GDPR) or Singapore’s Personal Data Protection Act (PDPA), offer some valuable pointers for banks in this situation.

“Ask your service providers questions such as ‘how have you trained your algorithm’, ‘what data sets have you used’, ‘what is the process’, etc.,” Fisher underlined. “And make sure you’ve got a kind of a constant monitoring.”

In countries such as Vietnam, cybersecurity has also attracted strong interest from governments. Techfest, Vietnam’s national event hosted by the Ministry of Science and Technology for the local startup community, even set up a new tech “village” specialised in cybersecurity this year to call for more funding and innovations in this sector. This is in line with the rise of fintech and e-commerce unicorns, such as VNPAY and Tiki.

Luong Duc Truong, CEO at cybersecurity solution provider VSEC, mentioned the three important developments in cybersecurity technologies: cloud security, smart device and application security, and risk management.

“A burgeoning startup ecosystem could provide much more flexibility and diversity in dealing with cybersecurity problems in a well-defined market like banking,” said Truong, who is also co-head of the cyber security startup village at Techfest. “No matter whether they are tech startups or large third-party technology service providers, the point is this firm can help banks optimise the cost while yielding more values.”

All in all, whether capitalising on in-house capabilities or leveraging the startup ecosystem, these strategies need to coexist in the short term as there is no “one size fits all” solution to digitalisation. “Maybe, we won’t use the term ‘traditional’ banks in the future but might see a new hybrid solution emerge in this fast-evolving ecosystem,” stressed Jayaraman.

E27