Building the Collaboration Muscle: Optimizing the Bank / Fintech Relationship

Building the Collaboration Muscle: Optimizing the Bank / Fintech Relationship

At Celent we’ve long said that banks must become better at partnering. And Fintechs have come around to the realization that it’s going to be the rare beast that can compete head-on with incumbent financial institutions – most will fare better by figuring a way to cooperate with them instead.

Eastern Bank, Celent’s 2016 Model Bank of the Year, took this idea one step farther by building Eastern Labs within the bank – an in-house Fintech. While most institutions won’t be able to replicate this (it’s really hard!), there are nevertheless some lessons for banks as they consider best how to engage with smaller, nimbler firms.  The diagram below shows the complementary strengths and weaknesses that banks and fintechs bring to a joint endeavor.

1603Master Slides for Eastern Model Bank Final_009

When they get together, some weaknesses of fintechs are mitigated (e.g., they now have access to data and a brand), while many of the disadvantages of a bank persist (e.g., slowness and risk aversion). Additionally, new complications arise: goals diverge, information may not be completely shared, the cultures are wildly different, and handoffs can be agonizingly slow.

So what are the lessons when a financial institution engages with a fintech? We’d suggest concentrating on four key challenges.

  • Focus on individual goals to ensure that they’re compatible, even though they’ll be different
  • Be as transparent as possible and build that transparency into processes from the beginning
  • Recognize cultural differences and address them at the outset; be realistic about the challenges
  • Set expectations about achievable timelines

Although other complications will undoubtedly arise, partnering is a muscle that banks haven’t exercised much. With practice and training, that muscle will get stronger, and with enough dedication, it will play a vital role in propelling the bank to the next level.

Technology and Service Providers: Different Beats, Same Tune

Technology and Service Providers: Different Beats, Same Tune
It’s been a whirlwind week for service provider analyst days and client conferences: Friday with Genpact, Tuesday and Wednesday with FIS, and Thursday with IGATE. Each firm is trying to differentiate itself amidst all the market noise; like banks, they’re constantly resisting the grind of commoditization. And while interaction was unique and fascinating, four common themes struck me as being indicative of the massive changes going on today in banking technology. Not coincidentally, they’re all consistent with what Celent has been saying about the evolution of the banking ecosystem.
  1. Focus
  2. Realignment
  3. Security
  4. Partnership
Focus takes on different meanings for different firms, but both Genpact and iGate were very clear about where they were going to spend time and energy, and where they weren’t (banking makes the cut for both of them). FIS may seem oxymoronic because of its product and service breadth and depth, but the company appears to be making steady progress towards rationalizing a variety of disparate products obtained through acquisition. Realignment follows focus. FIS is for the first time dividing itself into three groups: North America, International, and Global Institutions (roughly the top 30 international banks). Genpact and IGATE are both focusing on nine verticals (the specific nine vary), with IGATE putting P&L responsibility with the verticals for the first time. They will both have, however, certain horizontal practices that continue to run across their verticals. Security is a key value-add for these companies; with a broader base across which to spread costs, they tend to impose attention and discipline that many smaller banks can’t hope to match. While specifics vary, all made it a point to mention their approach to security. As the issue continues to increase in importance, we think this element of their value proposition will become ever more significant. Partnership is perhaps the ultimate defense against commoditization. Each of the three firms mentioned in their first breath the desire to work with their clients as Partners. Celent has written extensively on the transition from a vendor/customer to partner/client relationship in banking, and while talking about it doesn’t guarantee execution today, it’s a necessary first step for it to be tomorrow’s reality. What will be particularly interesting is the ongoing tension between providers’ professed desire to do the right thing and regulators’ apparent wish that contracts spell out in gory detail what will be required (including who bears responsibilities for mistakes). For more, see an interesting American Banker article here: For providers, guaranteeing that they can pass regulatory muster with minimum fuss will be a key requirement as they seek to win more business. As the year continues we’ll be watching keenly to see whether other providers’ actions echo these trends, and what banks’ reactions are. As a footnote, two of the firms have taglines, one brand new, the other a bit older: IGATE: Speed. Agility. Imagination. Genpact: GENerating imPACT FIS may have an opportunity here to help define itself; right now it’s self-admittedly one of the biggest companies that no one’s ever heard of. What do you see in the marketplace? Has my quick synthesis missed a key trend? I welcome your thoughts.

The vision behind the Banorte-IBM partnership

The vision behind the Banorte-IBM partnership
Banorte and IBM announced today in a press release a “10-year strategic agreement that will allow the Mexican finance institution to create a new customer-centric banking model.” For years we’ve been discussing best practices in bank transformation; but few have actually been implemented in more than piecemeal fashion.  Three aspects of this US$1 billion alliance strike me as noteworthy:
  1. Banorte has decided that the time is right to undertake a radical restructuring of its relationship to, and view of, its customers. Now the number three bank in Mexico, with 20 million customers, Banorte realized that delivering value could more effectively come from existing customers, rather than expanded market share. They aim to create value from increased share of wallet, cost take-out, and improved risk management.
  2. The transaction is structured as a true partnership, with risk sharing baked into the pricing, and is structured to self-fund incrementally over time.  IBM will realize upside potential if it over-delivers on a set of specific KPIs.
  3. Senior management was not only involved in the structuring and approval of the deal, but will be heavily enmeshed in the details on a week to week basis. Banorte and IBM recognize that this is much more than simply a technology play, but instead encompasses every phase and level of the bank, from platform, to organization, to process.
While this transaction, five months in the making, is clearly in its early days, Banorte and IBM are making all the right noises about how to execute on a well-structured vision. True partnership, risk sharing, and a professed commitment to true customer-centricity are necessary, if not sufficient, conditions to a potentially extraordinary deal. In the spirit of full disclosure, I worked at IBM from 2001 until 2009.