Financial institutions are facing a very challenging environment not only due to regulatory requirements leading to increased capital requirements and heavier liquidity conditions, a macro-economic environment with low to negative interest rates and limited growth prospects, but also due to changing customer needs and behavior, all a very fertile ground for increased competition out there to disrupt or at least challenge the financial industry among which a very rapidly growing Fintech world. Professor Björn Cumps in his video message outlines the drivers and characteristics of Fintech start-up’s.
The Vlerick Centre for Financial Services with its increased focus on regulatory changes and the impact on strategies and business models of the financial institutions and second on technological developments, digitalization and innovation in the financial industry wants to help the financial industry to address the challenges the industry is facing and to take advantage of the opportunities such changes are offering. The last two editions (7th and 8th) of Dialogue were already focusing on innovation, technological developments and Fintech. This 9th edition of Dialogue is now giving the floor to entrepreneurs in the financial services world.
Most of the banks have set up initiatives to better understand the external innovations ranging from setting up incubator platforms where start-up’s have access to facilities and banking expertise to providing financial support by investing in specialized funds focusing on Fintech start-up’s, to ultimately acquiring interesting Fintech start-up’s. The testimonies from a few start-up’s in this edition of Dialogue shows that these start-up’s do attack (at least part of) the service offerings of financial institutions, in almost every sector of the financial services industry with here in this edition examples in the payment industry (“Towards unified mobile payments”, Peter Opdebeeck and Joël Van Boeckel), in asset management and private banking (“The Easyvest Story”, Matthieu Rémy) , and in financial data services (“African Markets” and other start-up’s, Cedric Donck), and as such can shake up the traditional service offerings of financial institutions, even act as a catalyst for financial institutions to improve (or even re-assess) their business model towards stronger customer centricity.
However, the entrepreneurs’ testimonies also demonstrate that there are several reasons why indeed financial institutions and Fintech start-up’s can be complementary and may therefore need each other to be successful. A few examples below of why start-up’s and financial institutions need each other:
- Fintech start-up’s are stronger in identifying gaps in customer needs or in linking financial services needs with consumer patterns without yet having the customers’ relationship; while banks have the customers but are still approaching the client in a very traditional way or with a narrow financial services scope.
- Fintech start-up’s put the customer at the forefront and through service prototypes and co-creation are gradually aligning their service offering to the customer needs; whereas financial institutions are more taking into account in the service design regulatory constraints, risk considerations and possible risks of profit cannibalization.
- In developing a new service, Fintech start-up’s have a more open and dynamic, more digital driven approach leveraging software knowledge as a core competency but still need to use at least the banking infrastructure; whereas financial institutions lack competences in digitalization and are constrained by their heavily integrated legacy systems and having become very dependent on their IT suppliers through outsourcing.
- New technologies such as Blockchain technology may require combination of different types of expertise and collaboration between different stakeholders to test applicability and scalability of new technologies (“Bringing Start-up’s and banks together”, Marco Witteveen).
While Fintech start-up’s are there to compete with financial institutions, the testimonies all show in one way or the other that FinTech start-up’s and financial institutions need each other. To achieve collaboration, partnerships therefore will become increasingly critical to a successful transformation towards addressing the rapidly changing customer needs. In addition, as one testimony states financial institutions are a natural buy-out when start-up’s want to cash in. Financial institutions and Fintech start-up’s are doomed to collaborate and therefore it will be key for financial institutions to change operational habits and acquire new competences to be successful in this diverse world of new ideas and start-up’s.
- Financial institutions will need to better understand the external world of innovation and to understand key trends and opportunities. Most, if not all, have innovation centers and providing incubator labs. On one hand, it will be important not to evaluate new ideas with the same eyes as done traditionally for internal service developments, on the other hand it is easy to get lost in so many initiatives without leading to improved customer responsiveness. Therefore business models need to be re-assessed to ensure not only alignment but more importantly reinforcement when investing in external innovation.
- While seeing a growing trend of incubator labs, we have also seen other initiatives to get a more holistic view of the Fintech world involving all stakeholders with initiatives such as Innotribe from Swift (“Fintech trends from the Frontline”, Fabian Vandenreydt), Fintech Belgium and Eggsplore . This is extremely positive but of course a proliferation of initiatives may lead to too much fragmentation and therefore it would be welcomed to see an increased collaboration between the different initiatives at least to develop more visibility of the sector, develop more transparency re intrinsic value of innovation and to be a stronger spokes platform to the authorities to provide the right environment for innovation to be successful.
- Financial institutions will need to invest more in how to set up effective partnerships with the Fintech world, particularly how to create win-win situations, what type of ownership depending on the short and long term value of the initiative, what about intellectual property, how to align structurally the partnership to the (renewed) business model of the financial institution, how to change the internal organization to work more productively and openly with external entities towards a better customer value.
For innovation to lead to new businesses and help the financial industry to re-invent itself, support from the authorities is key to create the right platform. It is encouraging to see that Belgium has now a minister in charge of the digital agenda. The article from Laurent Hublet, advisor to and as member of the cabinet of the Deputy Prime Minister Alexander De Croo highlights where the authorities should help to reduce and/or eliminate barriers to the development of a prosperous Fintech industry in domains such as access to capital, ability to attract talent, business model innovation (such as improved business-to-business) and increased use and more openness. It is up to the industry in general to keep the pressure on the authorities.
Vlerick Business School in general and through its Centre for Financial Services is committed to support these developments and help all stakeholders including financial institutions, Fintech start-up’s, regulators and authorities, and ecosystems with relevant research and up-to-date education.
We appreciate receiving feedback and reviews.
Ignace R. Combes
Chairman Vlerick Centre for Financial Services