Fintech labs could be at saturation point
Fintech labs have been a way for banks to work with start-ups to develop the products and services the incumbents need. With so many banks now taking this same approach, what's the chance of true innovation?
After initially eyeing fintechs as a potential threat, banks decided to bring them on to their side, and under their terms, with the creation of a series of fintech labs.
With the majority of global banks either directly running or having access to such labs, the process has reached a level of maturity.
Accenture runs a number of FinTech Innovation Labs, including in London, Hong Kong and most recently Dubai. A consortium of 28 banks participate as mentors in London. This year, the lab received 300 applications from start-ups, and 20 were selected for inclusion.
The labs give start-ups the opportunity to gain access to established institutions that could become financial backers, business partners or customers, and obtain advice that would be otherwise out of their reach.
Tom Graham, programme director of Accenture’s FinTech Innovation Lab London, says: “The lab provides advice to the fintechs. It gives them exposure to venture capitalists and a chance to work with previously successful fintechs. There are genuine benefits for the participants, allowing them to grow their businesses and employ additional staff.” Santander is one of the banks that operates in the Accenture lab.
Sigga Sigurdardottir, head of innovation at Santander, says: “We’ve seen a hugely positive response from all involved, both start-ups and the mentors. One of the key benefits of the FinTech Innovation Lab for the start-ups is the learning – what the real challenges and customer pain points are and what banks are like to work with (lead times, compliance, sales cycles).”
She says that having access to the banks as a potential end-customer during the development process helps start-ups to better understand what they are creating.
“For some fintech companies, it has helped them realise that banking isn’t the right fit for their offering or that the UK market is not the right place to be," says Sigurdardottir. "Meanwhile, for others, it highlights the need and appetite for their product or service.”
Other banks keep their labs in-house.
Stuart Riley, global head, markets and securities services technology and markets operations at Citi, says that when the lab was founded it was used as a way of attracting engineering talent to the bank. He says this idea has progressed, adding: “Today it’s much more. The labs are multi-discipline, they have business domain experts, data scientists, engineers and start-ups all co-located. This is key as it allows us to go from idea to product or service very rapidly.”
However, at a time when transaction banking is beginning to converge through regulation and messaging standards, there are concerns that by developing technology separately the banks are creating new silos.
As well as being part of the Accenture labs, Santander also has its own innovation division, and a $200 million fintech venture capital fund.
Sigurdardottir says: “It is important to recognise that creating new customer propositions is not the same thing as creating new silos. We recognise that in order to succeed, the customer must be at the heart of everything we do.
"We also recognise that in order to evolve and grow, collaborating with the most innovative companies, to consistently provide better services to our customers is essential.”
Christian Hoppe, founder and director at Commerzbank’s Main Incubator lab, and head of credit solutions at Commerzbank, says there is a need for banks to continue developing their own services, adding: “It is true that platform solutions play a new important role in banking, but banks nevertheless need – and therefore also work on – up-to-date technological solutions.
“This allows them not only to offer new products, for example, but also to build up important technological knowhow within banks. And these new technologies allow, for example, tech-driven start-ups to hook up their solutions by APIs provided by the bank: with API banking, banks are open to third-party solutions and enable them to become platforms.”
Accenture’s Graham says there are numerous examples of banks choosing to work together rather than developing a new product alone.
“If there is sufficient market opportunity, and it doesn't break competition rules, banks have left their silos and come together to address industry problems," he says. "A good example of this has been in how multiple banks have come together to develop solutions around the blockchain.”
When something is successful, banks will want to share it with the wider industry.
Citi's Riley says: “The stuff that makes it converges and the stuff that doesn’t is being kept in-house. To some extent you see this playing out in spaces like settlements or processing, where simplified and more common workflows bring benefits to everyone and thus you see more joint investment in those areas.”
Riley adds the way start-ups view the banks has also had to change.
“Previously many start-ups started by thinking they were attacking the banks," he says. "Now most see themselves as partners or providers. I think start-ups are now seeing the labs as a great opportunity to find banking sponsors and that gives them an accelerated path to product adoption or distribution.”
Sigurdardottir says the whole industry is having to adapt to a changing mindset, adding: “Sharing learnings and best practice is something more and more companies are open to, meanwhile ensuring the customer remains firmly at the heart of our propositions.”
With so much access to the banks and their customers, there are concerns many start-ups now view the labs as a money-making exercise and are no longer looking to build genuinely innovative, disruptive new technology-enabled businesses that benefit customers, but rather developing ideas to sell to banks that protect their incumbency.
Graham says there has been increased focus on the space, and additional funds have followed accordingly.
“There has been a theme over the past few years that hot money has come into the sector," he says. "This has elicited responses from people looking to benefit from the market forces.”
However, Graham says the banks are savvy to the companies that are looking to make a quick profit, adding: “The banks vote on who is included in the labs. It provides a good check on whether what is being proposed is a viable business model and if they want to invest.”