Partnering for Better Innovation

Instead of viewing fintech companies as disruptive competitors, should the banking industry embrace these innovators as potential partners?dachschundunsplash

While writing my latest for BankDirector.com, “Three Things Bank Boards Can Do to Improve the Use of Technology”, I had the chance to speak with Ryan Gilbert, a board member at Sacramento-based River City Bank. In his day job, he’s the CEO of Better Finance Inc., a financial technology company that provides leasing and credit solutions to consumers and small businesses. As both a director of a traditional community bank as well as the head of a fintech company, he has a unique perspective on the intersection of banking and innovation. So I was curious what he thought about the impact of non-bank competitors, like Square (where Gilbert serves as an advisory board member), on the industry.

His thought? If you can’t beat ’em, join ’em. While many disruptive fintech companies may be chomping at the bit to change the game and beat the banks while doing it, it’s just not in the cards for now. The same regulators that give bankers pause when it comes to making innovative moves also ensure the safety and soundness of these grand old institutions. For once, the system might be on banks’ side. Gilbert says:

You can’t compete with banks. You can’t operate in a regulated financial environment unless you PARTNER with banks.

We talked in advance of BBVA’s purchase of Simple, a move that I can’t help but think will prompt similar moves throughout the industry (and I’m not the only one who wonders if we’ll see a wave of fintech start-ups bought up by big banks). Sounds to me like a win-win situation. Gilbert says of the almost 7,000 FDIC-insured financial institutions across the U.S., he knows of fewer than 10 that actively work with fintech companies to bring innovative financial services to the consumer. He thinks the industry could see a lot of benefits from these partnerships:

It’s a shame, because if we could have more institutions saying ‘We’re going to work with NBFI’s [non-bank financial institutions], we would see better innovation. We’d see more innovation.

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1 Comment

  1. I am not in total agreement with Ryan’s comments. Although I do agree that Banks and Fintech firms should be looking to partner and work together where possible to improve the proposition for customers, I don’t necessarily believe that this strategy will make banks more innovative.

    Innovation occurs at 4 level with increasing returns for the business and customers:
    1) Process
    2) Product/Service
    3) Business Model
    4) Industry – changing the way participants compete

    My experience in financial services is that banks are already pretty good at Level 1 – by buying in tech to improve process – and not too bad at Level 2 in certain areas. Just look at the advances in process and products around capital markets trading, algo trading, prime brokerage, etc. What they all to often fail at is passing on the benefits of this process innovation to the customer – they keep the rewards for themselves rather than sharing equitably. This has to change.

    To make banks more innovative requires a change in approach (be it slow and adaptive) to the way they do things, to the way they frame their role as a service provider, to they way they define and then execute their strategy.

    This change requires buy-in from the top, from the board. It will be a slow change. The CEO of one of the larger European banks I have worked with put it to me quite nicely;

    “Our business is like a large oil tanker, it takes a lot of effort to make it change course. What we need is a few agile speedboats that buzz around the tanker. Eventually, as more speed boats join the party, the wake of these boats will help make the oil tanker turn more easily.”

    We have not really seen a major bank challenge the industry with innovation at Level 3 and 4. Saxo Bank and Well Fargo are the most recent examples of business model innovation in the Industry, but it has not called the larger players to account.

    It will be interesting to see if, as occurred in other industries over the past 20 years, a new entrant or existing player can do something so innovative that it fundamentally changes the way the industry competes – Level 4. This is where real value is delivered to all – Apple (Music industry), Ryan Air (airlines), Skype (communications)……

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