Historically, the investment banking industry has prided itself in making innovation a priority and being an early adopter of new technologies. More recently, the rise of financial technology (fintech) has brought with it a great potential for both opportunity and disruption for investment banks. Fintech could be a game changer for banks, but only if leaders develop a cohesive vision to make the most of it.
In the past five years, global fintech financing has grown rapidly. Total investment in fintech startups from 2010 to 2015 is estimated at more than $47 billion, with more than $2.6 billion in capital markets fintechs. Venture investment (e.g. Santander InnoVentures invested in Ripple Lab), acquiring startups (e.g. acquisition of Honest Dollar by Goldman Sachs), and building innovations in-house (e.g. Citi’s ‘Citicoin’) were among the most popular strategies to date.
But now, more and more investment banks are choosing to engage differently – e.g. with fintech via incubation programs and joint innovation. Jeff Gido, Goldman Sachs’ Global Head of Fintech for Investment Banking, believes the industry is on the cusp of a “third wave” of innovation development, to be characterized by partnerships between established players with strong brands, and startups who can provide platform advances without the need for risky build-outs.
In order to achieve a meaningful innovation strategy, there are some inherent challenges that banks need to consider and overcome. These include: Restricted budgets; the growing number of startups to track and evaluate; getting fintech solutions to work in an enterprise model; and legacy system interface challenges.
In an environment where investment dollars and management time are increasingly scarce, it is imperative for banking leaders to develop a pragmatic and aligned approach to innovation. A sound fintech strategy could be an important element of this – but only one element.
Here are some key steps to navigating the new wave of fintech for investment banks:
- Build an innovation architecture framework: Designate a chief digital officer to set a comprehensive strategy and build a framework that relies on collaboration from all innovation sources.
- Make a sound fintech strategy an element of this architecture: Avoid becoming a fintech tourist. Instead of investing in the hottest, latest startups, consider a holistic adoption of fintech. Make it a driver of benefit and an inspiration for innovation across all departments.
- Combine various technologies and build relationships across industries: Apply various digital technologies in combination for the most impact. Relationships between established players and startups can help build platform advances while avoiding costly build-outs.
Fintech does offer tremendous opportunities for growth and innovation for investment banks. Successful banks of the future will have to avoid the fintech money pit and develop a broader vision of innovation to realize the potential benefits of new technologies.
To learn more, read the full report: Challenge 8: Getting Innovation Right Accenture analysis on CB Insights data  https://ripple.com/ripple_press/ripple-adds-santander-innoventures-fund-as-series-a-investor  http://www.goldmansachs.com/media-relations/press-releases/current/honest-dollar-closing-05-23-16.html  https://bitcoinmagazine.com/articles/citi-working-citicoin-cross-border-payments-1435789093  Goldman Sachs: We’re in the “Second Wave” of Fintech. Business Insider. September 2016 http://www.businessinsider.com/goldman-sachs-global-head-of-fintech-on-the-three-waves-of-fintech-development-2016-9