What financial institutions can still learn from fintechs

Convergence of minds | Always more to learn | Commit to innovation 

Fintechs and traditional financial institutions (FIs) have learned how to play well together. And, in doing so, they have catalyzed massive transformation across the financial services industry. Fintechs have been particularly adept at identifying and solving niche gaps that were inherent in financial processes and systems. FIs have been quick to partner with them and help them bring their ideas to market. It is the coexistence and collaboration between the two sectors that is ultimately driving innovation in financial services markets.

FIs have learned a lot from their interactions with fintechs over the past decade. One of the big lessons is that innovation is amorphic. It is not about a single partnership, investment or technology. Nor is it isolated within siloed functions, accelerators or linesof business. Innovation is holistic, it is decentralized, and it is intricately intertwined within an organization’s culture, structure, purpose and value proposition.

They have also learned that innovation cannot simply be bought or rented. Innovation — the stuff that sees incremental improvements snowball into massively valuable outcomes for customers — comes from a combination of internal and external capabilities working together. Some of the most innovative FIs are those that are bringing together multiple sources of innovation; executing on a single plan that combines internal investments and capabilities with fintech investments, partnerships and accelerator models to help maximize available capabilities and outcomes.

These two lessons have led to a third realization among FIs: that it’s all about the ecosystems. Over the past few years — particularly since the onset of the pandemic — there have been many types of financial services organizations that have embraced ecosystems with fervor. Yet the leaders are not necessarily those that belong to the biggest ecosystems or that carry the most weight in their ecosystems. Instead, the leaders are the ones taking the most collaborative approach to creating value with their ecosystems. They are the ones keeping the focus on the customer, not themselves.

With these lessons in mind, many FIs are now starting to see real results from their innovation efforts. But there are still a few tips that financial services executives could be learning from fintechs. Here are my top five (in no particular order):

1. Focus on the client, not the ROI. There is a reason investors are pouring money into pre-revenue startups; they recognize that innovation doesn’t always lead to immediate financial ROI. Indeed, every startup knows that if you build the right product and bring the right clients, the revenue should eventually follow. Rather than focus on monetary ROI, FIs would be well advised to focus on the value ROI that comes from their investments — perhaps improvements in  customer experience, the creation of a more innovative culture, or more agile infrastructure, for example. Regardless, the focus should be on building a great solution rather than building an immediate revenue stream.

2. Structure is overrated. Rightly or wrongly, the common perception is that fintechs are flat, informal and agile, while financial institutions are large, formal and slow. And that all comes down to structure. Size and structure have a massive impact on organizational agility — the more complex and hierarchical the structure, the more pervasive the internal competition and the more disruptive the internal politics. While a certain level of structure is important for complex financial organizations, there are approaches that could be learned from fintechs (such as the creation of joint initiatives and targets) to help drive  cooperation between units and to encourage a more non-hierarchical approach.

3. Embrace failure. Financial institutions are naturally risk averse. So it’s not surprising that most new initiatives tend to be safeguarded against failure. But that is not the path to innovation. Instead, FIs should be innovating like startups — moving quickly, failing confidently and testing constantly. When starting new initiatives, the leading FIs are starting small but thinking big. This not only allows them more scope for success, it also enables them to pivot to different use cases based on a solid foundation. And if it fails? Embrace the fact that your team has learned more about the problem and have practiced new ways of working and decision-making.

4. Think like a product manager. The most successful fintechs think in terms of product lifecycles, taking a strategic view of their innovation to drive towards a market-ready outcome. Create clear product strategies supported by agile ways of working and a robust roadmap that spans the full product lifecycle. This allows FIs to not only refocus their efforts and make tactical shifts when needed, it can also provide greater clarity to management and the board on the investment lifecycle and when additional investments might be needed.

5. Unlock the data. Fintechs are driven by data. Most financial institutions are still far from unlocking the power of data. Recent studies suggest banks are still using less than 10 percent of the data they have. The value left untapped in that data would make a fintech swoon; some would pay huge amounts to get their hands on just a small portion of that data (even with all the accompanying regulation and safeguards). Those FIs with small ‘fintech-like’ units tend to do better at unlocking the value of their data. But most will likely still need to work to change the way the wider business thinks about data if they hope to reap the real value of innovation. 

Perhaps the greatest lesson financial services executives can still learn from fintechs is about commitment. Fintechs are committed to innovation; they don’t just dabble in it — they live it, breathe it and champion it. They don’t flirt with partners and play around the edges — they get married and remain fully committed. They put all of their effort and all of their resources into driving innovation. Few banks can say the same.

Fintechs and FIs have already learned a lot from each other. And as they continue to converge and partner, more lessons are expected to emerge. The smart financial services leaders will be the ones watching for them.