Fintech maturity fostering strong bank developments


Kimberley Long
Published on:

Banks are working increasingly closely with large software and fintech companies to improve internal efficiency, but there is still progress to be made in understanding what both parties can gain.

Deutsche Bank's collaboration with German financial software group GFT on its risk and profit and loss (P&L) platform dbPalace enabled the bank to simplify a lot of complex processes, segmenting a 200-strong workforce into ten teams and streamlining 38 processes down to just five.

Adapting to new operating models required Deutsche Bank to overhaul its internal practices. Chris Bezuidenhout, CIO for markets finance at Deutsche Bank, says: “There was a drive from the business to transform the operating model - it took three years of development to create the system. While still retaining the fundamental components, by taking the strategic approach we could consolidate.

Dean Henry, BAML

"The function of producing daily P&L and performing independent price verification are both key control processes for banks. Being able to release to production more than 20 times per year in such a business critical area of the bank is a significant challenge and required a focus on quality assurance practices that avoid business disruption." 

To do this successfully, the bank admits that one hurdle it had to overcome was ensuring its own staff were aware of the benefits. Bezuidenhout adds: “It is not an easy process to update the methods of working. It is a learning process for staff, we had to prove that agility was something that went beyond the latest business lingo. But to make real progress needs ambition. It has to go beyond short-term wins.

"The key to the success of this initiative was to ensure that agility and a focus on business outcomes became the driving objective – moving to just-in-time requirements (six to eight weeks out from development), releasing to production more than 20 times per year, and doing so with more than 10 full-stack feature teams responsible for developing the platform, but also able to operate independently."

Bank of America Merrill Lynch (BAML) announced last month it was collaborating with PayPal to support payments through its bank-to-customer digital disbursements payments option. The product is used by insurance companies to make direct payments to the bank accounts of customers after they have had a claim approved. The inclusion of PayPal means customers in Mexico, the Philippines and four European countries can be paid directly into their accounts.

The BAML digital disbursements product has been in operation since 2014, but with the new tie-in funds can be transacted to customers using just their mobile number or email address. The ability to make payments across borders and in a variety of currencies swiftly is a significant step forward, and facilitated by PayPal’s presence in multiple markets.

Dean Henry, head of global transaction services (GTS) innovation at BAML, says: “The genesis for our agreement with PayPal was the need for a solution to address a client problem, being the need to make low-value mass payments outside the US. We determined that using PayPal’s digital wallet technology was the best response to meeting that need.”

There has been a shift in the approaches taken by the banks towards working with fintechs of all sizes, whether they are start-ups or the likes of PayPal. These developments can come through other parts of the bank. Says Henry: “Our existing relationship with PayPal, including through the GTS business, certainly helped progress the dialogue.”

Henry says the bank regularly seeks outside advice on what is newly available: “We take a proactive approach in terms of reaching out to the fintech community.  At the BAML Technology Innovation Summit, which is held each year in Silicon Valley, we meet with venture capitalists and fintechs who present ideas on how to solve issues that our clients are experiencing. It’s a fantastic way to generate dialogue amongst the industry players. Making blind calls is not an effective way of establishing a relationship.”

Fabian Vandenreydt,
chairman of B-Hive
Inevitably, to bring efficiency to this increased interest in finding collaborative opportunities, there are companies that have developed to facilitate such connections. B-Hive looks to link up start-ups with larger companies, regardless of where the parties are based.

Fabian Vandenreydt, chairman of B-Hive, says there has been a change in how these companies are perceived: “There was the misunderstanding of the fintechs and start-ups that they were going to be competition, but more and more we see how their offerings have evolved.”

The maturity of the industry has helped to provide reassurance about the security of these companies, from banks' own AML and KYC perspectives.

BAML’s Henry says: “The rapid growth of e-commerce is forcing the entire fintech ecosystem to mature. Consumers and small businesses are transacting in more countries and cross-border payments are becoming more prevalent. Consequently, local governments are examining fintechs with increased scrutiny and new regulation is forcing higher standards within operating practices. Banks are in-turn benefiting from this trend as our potential fintech partners are better versed in areas such as AML and KYC requirements.”

Although there is more openness towards collaboration, the differences between the banks and the fintechs – and equally the lessons they can teach each other – still need to be taken into account.

The method of testing a product through a proof of concept process is out of date, according to Vandenreydt, with processes that can take up to six months proving too draining for fintechs that do not have the resources to dedicate to projects that might not come to a positive outcome.

Instead, Vandenreydt says banks need to be open in their expectations: “Banks and start-ups want to engage effectively, and not spend too much time on multiple proofs of concept. The focus has started to shift towards the banks doing greater amounts of pre-screening, and focusing instead on a proof of value.”

Collaboration is a beneficial learning process for all parties, says Henry: “As a bank, our core competencies include the stability, safety and soundness of our customers’ data and everything that goes with that. We focus on meeting those objectives to the highest possible standards. When we can bring our infrastructure and marry it up with a company that has created a new way to solve a problem, then it’s a win for all involved - clients most importantly.”

Vandenreydt is aware of what fintechs can take away from work with much larger institutions: “Fintechs are learning from the incumbents how to work to scale. They can see the banks working with 100,000 or more clients, and can learn how to segment them to provide optimal relationship management.”

Bezuidenhout says understanding GFT helped with the implementation of dbPalace: “It was a true strategic partnership. Deutsche Bank has worked with specialist technology consulting firm, GFT for more than 10 years. This long-term partnership has proven to be very successful, with GFT being completely open and transparent on the lifecycle of each project as it develops. They also listen and provide constructive input that often challenges the bank’s thinking" 

Deutsche Bank understood it had to work with the various teams involved in the project to ensure its success. The inclusion of its internal IT department was crucial to its success, but one that banks have previously not looked on as a priority. Bezuidenhout explains to ensure the new platform worked effectively it required the bank’s own IT team to be involved throughout the process.

This idea of operating closely with the internal IT teams is echoed by Vandenreydt: “The move to embrace agility needs to be seen across the business. There has to be the same level of understanding from IT as they will be the people that are working with the product in the end. It does not work if the IT departments feel like it is impinging on their internal developments.”