Banks and start-ups: collaboration is the name of the game

by Hans Tesselaar, Executive Director at BIAN
Publication: FINEXTRA

Banks have long been trusted to care for our money, and for good reason. These highly skilled organisations have centuries of experience in the development and evolution of financial products and custody of our assets and, bar the odd bump, have served society well. As financial instruments, and customer expectations have evolved, and the markets have changed pace, banks have increasingly turned to innovative technologies to allow them to keep fulfilling their primary role of ensuring our assets are well maintained.

In other words, banks are organisations that handle money well, but, despite their investment in new technologies, they are not technology companies. Yet they are organisations that rely on technological innovation — and this often comes at great cost. Many banks have now accepted that their own operational limitations mean that their technology budgets are, in some cases, best used to hire an external development company to further drive innovation.

There are some parts of their IT infrastructure that can be best managed by an in-house development team. Equally there are some parts of a bank’s technological requirements that are so mission-critical that their development and implementation cannot be trusted to anyone other than a well-established external company. But there is a third way. Partnering with small financial technology (fintech) companies can give a bank an extremely cost efficient method of innovating, developing and researching technology that can be used to create novel products and refine existing processes and practices to make them much more efficient. I am increasingly seeing fintech start-ups focused on building lean IT solutions, for example — these are then a significantly cheaper option for banks looking to upgrade their technology.

Recent years have seen great growth in incubator programmes. These initiatives partner smaller, innovative growth companies with larger, industry-defining players — and as such, in the case of fintech-specific incubators, they can give banks access to a large number of progressive technology companies. Programmes such as the FinTech Innovation Lab from Level 39, a Canary Wharf-based fintech incubator, provide funding, contacts and a host of other resources to small start-up technology companies. These companies are, as the word “incubator”may suggest, nurtured together in a spirit of technological drive and friendly competition. This system drives results with healthy peer pressure and brings about creative ideas and advanced technological gains in a timeframe that an in-house development team just can’t match.

Banks can clearly benefit as well from this type of partnering when seeking to purchase new technologies to underpin their services — and this goes to illustrate the power of collaboration in technology, especially in the financial services industry. It is important to note that collaboration is a two-way street. Large financial service companies are increasingly working together on a common set of IT standards, and new market entrants have a responsibility to respect these agreed standards and comply accordingly to ensure them a seamless integration into the existing bank’s IT landscape.

The fact is that we live in an age of increased banking competition and banks can either continue to try and compete — with the new players, and also amongst themselves — or financial service players of all sizes can come to terms with the new reality of collaboration. Competition doesn’t come from back-office technologies battles, but rather from customer-facing, value-add services. We are entering the era of collaboration, and I welcome this.

Commment on the Blog at FINEXTRA