BAI Banking Strategies published this article.

By Sam Graziano, CEO, Fundation

 Be the Manufacturer or the General Contractor

Banks are in a strong position to win the FinTech revolution—but what remains are the complex questions about how to execute. There are a few basic strategies: (1) do nothing; (2) “manufacture” your own capabilities; (3) operate as the “general contractor,” aligning your institution with third parties that can do the manufacturing; or (4) some combination of manufacturing and general contracting.

For banks that are predominantly or entirely in relationship-driven lines of business rather than transactional lines of business, option (1) is viable for now. The pressures on your business are not as severe, and a wait-and-see approach may enable you to make more informed decisions when the time is right.

For others, option (1) is fraught with peril. Assuming that you choose (2), (3) or (4), the technology implementation process will be hard, but what may be harder is the related change in organizational psychology necessary to execute on those decisions. Resistance to change is natural, and some employees may view FinTech initiatives as posing potential career risk or challenging the beloved status quo, whereas these initiatives are more likely to present opportunity.

That is why FinTech initiatives should be driven top-down. Executive leadership should command these initiatives and set the vision. More important, executive leaders should explain why the institution is pursuing a FinTech initiative and why it has decided to build, partner or outsource. Explaining why can reduce the natural resistance to, and fear of, change.

Building FinTech initiatives in-house is hard work but has advantages. It provides maximum control over the project and limits counterparty risk (vendor management). The downside is that the skill sets required to execute are wide-ranging: from project management, product management, software development and quality assurance to managing hardware. That said, building in-house doesn’t mean that everything needs to be proprietary technology. After all, most FinTech platforms are a combination of proprietary technology along with third-party components that are configured and customized. Should you elect to build off of third-party software, you must ensure that the platform is highly configurable and customizable. If you don’t have control (or significant influence) over customization, you will lose the opportunity to continuously reengineer the processes necessary to rapidly innovate and evolve.

The lack of flexibility to configure and customize is the single biggest criticism we have of many of the legacy technology providers to the banking system and even some of the new software vendors to the banking industry that built their platforms on flexible technology. While materially better than older solutions, most of these new firms sell pre-packaged solutions (or “managed solutions”) that place limitations on a bank’s ability to customize the way they want to do business. Does buying the same pre-packaged solution as your competitors give you a long-term sustainable competitive edge, or does it simply provide a long overdue upgrade?

Being the general contractor isn’t easy, either, but banks are very adept at it. You could make the argument that most banks are just an amalgamation of mono-line companies (mortgage, auto, credit card, commercial, corporate, payments, wealth management). Within each of these business lines, they employ different systems (mostly third-party systems) and are therefore already operating as general contractors. The business line leaders we have come to know have significant experience managing critical third-party vendors and therefore have the skill set and knowledge to manage even the most innovative financial technology partners. What’s more, they often know what they would want their operating platforms to do, as opposed to what they are built to do today.

Should your institution decide to partner or outsource services to a FinTech, it is paramount to align interests. Both parties must establish shared objectives and measurements of success, identify and discuss potential areas where interests may not be aligned, and focus on driving results that will not happen overnight. Banks should embrace their FinTech partner as just that: a partner, not simply a vendor. Welcome the flexibility that they offer, and allow them to empower your institution to innovate and evolve.

Don’t Squander the “Trust Asset”

In a world where Amazon, Google and Apple dominate the digital landscape, deliver ideal customer experiences, and may possess a “trust asset” of their own, the status quo is not an option, no matter how painful change can be. If your financial institution intends to compete over the long term, executing on a FinTech road map is vital. While there are potential transformational technologies on the horizon, they are unlikely to threaten the majority of financial services providers that facilitate payments, extend or facilitate the delivery of credit, or assist consumers and institutions with managing savings and wealth. As a result, the near-term decisions that need to be made will have consequences, but those consequences are not as dramatic so long as financial services companies are moving toward infrastructures with a foundation of flexibility. Over the next decade, flexibility will allow financial services companies to compete more effectively by delivering the products, services and experiences that customers will demand; flexibility is what will allow your institution to maintain its competitive position over the long term.

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Sam Graziano, CEO of Fundation Group LLC

Sam Graziano is a seasoned financial services executive and entrepreneur. He co-founded Fundation in 2011 and is directly responsible for the strategic direction and growth of the company. Prior to founding Fundation, Mr. Graziano spent more than a decade in investment banking and private equity, where he developed an expertise in strategic, financial and operational issues for banks, specialty finance companies, asset managers, broker/dealers and other institutions throughout the financial services sector.

 

Disclaimer: The views and opinions expressed in this article are those of the author and do not reflect the views of Fundation Group LLC or partner institutions.