In our previous post, we discussed two scenarios established financial institutions face in a world where fintech ventures investments are growing in leaps and bounds. We see incumbent players facing two scenarios—digitally disrupted or digitally reimagined—and believe it’s up incumbents to determine their own destiny.
Our interviews with 25 influential financial services executives involved in innovation point to three behaviors that banks say could allow them to reimagine themselves digitally:
Open innovation is at the heart of the digital revolution, exemplified by the open source movement that has supported so much of the new technology development in recent years. For large organizations this means engaging with external technology solutions, knowledge capital and resources early on in the innovation process. Often it involves opening up the organization’s own intellectual property (IP), assets and expertise to outside innovators to help generate new ideas, change organizational culture, identify and attract new skills, and discover new areas for growth.
The open concept is embedded in many of the new fintech companies’ approaches, but established banks have also been getting in on the act. And the open approach to innovation is gaining significant popularity amongst the survey respondents with 40 percent of the banks we surveyed already reporting some open technical innovation activities and another 56 percent setting one up in the next two years.
Traditionally, financial services incumbents have partnered with others in their own industry—especially to share processes or services considered “non-core,” which help all collaborators either reduce their costs or create new market opportunities. Yet collaboration will need to go a step further in the future, to build ties with those in different industries and with different outlooks, and to identify new ways to generate value.
Collaborative engagement with start-ups has already become particularly popular. Take the FinTech Innovation Lab model, which brings together multiple banks to collaborate and provide mentorship to start-ups that could potentially help their businesses. But cross-industry collaboration will also be crucial for future value generation.
Venture investing has always been at the heart of the start-up innovation model. Now, more than ever, established financial services firms are taking this route to try and generate innovation for their business. Corporate venture arms are used by one-third of the surveyed bankers and a further third expect to launch one in the next two years.
As with all investments, the value can go up as well as down—and with venture investment the risks are significantly higher than when investing in established businesses. Yet there is a further complication for a corporate venture arm, because the return on investment can be measured in two ways: either as a traditional direct return on capital invested through their equity stake, or as a measure of the value generated for the parent business. There is also the risk that a strategic investment will constrain the bank’s ability to adopt new technology as it develops.
The good news is that in conducting this research, we discovered a sense of commitment and purpose among leading bankers to re-imagine the business model, build momentum, fail fast and learn from their mistakes. Embracing openness and collaboration, and making smart investments is a good place to start. But banks will know they are winning when bank valuations start to factor in the future value of proven innovation, in addition to protecting the core franchise.
To learn more, read The Future of Fintech and Banking: Digitally Disrupted or Reimagined?