With a focus on the financial services hub of Scotland, we explore how major business and societal challenges — from digital disruption to Covid-19 — are intensifying the need for greater collaboration between all of the sector’s stakeholders.
FINANCIAL SERVICES ECOSYSTEMS SERIES — November 2020
Financial institutions — in banking, insurance, payments processing, pensions and asset management — have been widely praised for their role in sustaining vital services as the coronavirus pandemic has shaken up economies and lives.
Even as the daily activities of hundreds of thousands of finance sector employees switched from offices to homes (often overnight), core capabilities — for digital banking, funds transfer, access to cash, new government loans and much more — were supported and, in some cases, enhanced, with huge commitment and barely a hitch.
That wholesale adoption of teleworking, cloud services and virtual conferencing was not the only trend to be accelerated by the pandemic, however. Many of the giants of finance, which in the past may have instinctively looked internally for innovation and new ways of serving customers, have upped the pace on a trend that has been underway for several years: of collaborating across the ecosystem of industry stakeholders that surrounds them and spans fintechs, global technology partners, government agencies, universities and social groups.
Nowhere is that desire to co-create more evident than in the financial services hub of Scotland, where some of the world’s largest banks, asset management companies and insurance firms have their headquarters or major operation centers, including NatWest Group, Standard Life Aberdeen, Lloyds Banking Group, Tesco Bank and Virgin Money.
Imperative to connectAs chief executive of Scottish Financial Enterprise (SFE), Graeme Jones has witnessed an opening up of collaboration models during his five years as head of the representative body of the country’s financial services industry — perhaps most markedly in the evolving relationships between the financial giants and the 150 or so fintechs that are clustered around Edinburgh and Glasgow.
“For a long time, there was a notion that startups were the rivals of large banks, asset management and pension companies. Challenger banks were potentially going to come in and end of the dominance of large-scale banks; fintechs would automate processes and payment systems; new blockchain investment platforms would end the role of asset managers,” says Jones, himself a former senior executive at RBS, Standard Life and Aviva.
Graeme Jones, chief executive of Scottish Financial Enterprise (Image: Chris Watt)
But that perception of threat has progressively turned to one of opportunity. “The whole environment has matured in recent years. What has been clear is that collaboration with fintechs has become viewed as not just useful but crucial to large financial institutions’ future success,” he says. “And both sides have truly embraced that.”
The imperative to embrace that is certainly appreciated on the inside of financial groups too. As Jamie Broadbent, head of digital and innovation at RBS International (part of NatWest), said at the FinTechTalents conference in London late last year: “Historically, all big banks saw themselves as a fortress, building walls to keep others out. Now we are recognizing that we are part of a finance ecosystem. And in order to thrive in our environment [we] have to connect and work with other people.” (See Fintechs sense a new appetite for collaboration across financial services.)
Gaining paceThe need to plug into a wider partner ecosystem has required a significant change of mindset — for both financial powerhouses and startups, says Stephen Ingledew, executive chairman of FinTech Scotland and a former a senior executive at Barclays and Standard Life. “Financial services leaders used to feel any response to an innovation challenge needed to be tackled in-house,” he says, highlighting the need to manage risk, compliance, legal and audit issues as a key reason. But the sheer pace of change — largely driven by digital finance but accelerated by the pandemic — has exposed those ‘fortress’ approaches as unviable. “There’s the realization that because of legacy issues around technology, process, culture, leadership and know-how big financial companies simply can’t move as quickly by themselves,” says Ingledew.
tephen Ingledew, executive chairman at Fintech Scotland
“They recognize that they can’t keep up with fast-changing demands. And if they’re going to be genuinely focused around the needs of customers, rather than thinking, ‘We know what’s best for them,’ then they need much more of a design-based methodology for understanding human needs — and that comes from a diversity of ideas. A mindset that says, ‘Are we prepared to go into this working together collaboratively?’” he adds.
As RBS International’s Broadbent has predicted: “In the future, there will be two types of bank: those that are quick and learn to move at pace [because they] partner with others, and those that are dead because they don’t make that switch. If you want to go faster, go together, [and] partners are the way to do that.”
But such partnering is by no means restricted to startups. “Their hand is also strengthened by bringing in the participation of their big global tech partners, universities, government agencies and charities, with everyone involved seeing potential benefit,” says Ingledew.
“What we are seeing is a realization that acceleration is absolutely essential — not for the bank, not for the startup, but for the market and the services provided.”
That appreciation of opportunity for fruitful collaboration in the face of economic adversity is also felt by Matt James, NatWest’s head of scouting for innovation and solutions across UK and Europe. Speaking on a recent webinar organized by SFE and Fujitsu, he said: “The post-Covid situation, with the difficulties in the economy and the acceleration of the move to digital channels, particularly in financial services, opens up huge opportunity for fintechs to really make a contribution. From the bank’s perspective, working with startups and fintechs [is] a core part of our strategy and I don’t see that changing.”
Echoing that in the debate was Richard Caldicott, deputy CEO for Prudential Financial Planning and director of customer solutions at savings and investments company M&G: “There’s definitely more appetite, more need and more demand for innovation than we had only six months ago and Covid forces more funding than before to make transformational changes, so there are definitely more openings, opportunities for fintechs in our organization.” He acknowledged that market leaders are always looking for the safest way to deliver new services, which raises issues when finding ways to partner with fintechs — especially younger ones.
However, there are calls for financial leaders to pick up the pace further and harden their level of commitment. Speaking on the SFE webinar, Dr Leda Glyptis, a renowned commentator on the banking and fintech ecosystem, said: “The current [Covid-19] situation creates the pressure to realize some of the [changes to digital finance] we’ve long been talking about.”
She acknowledged that the collaboration with fintechs is a key part of bank strategies but too often it has been more about hedging bets, managing the pace of the sector’s transition to new models and experimenting and learning. “Collaboration has largely moved at the pace and preferences of the larger entities,” she said. But she does see new momentum.
“It has started gear-shifting: what we are seeing is a realization that acceleration is absolutely essential — not for the bank, not for the startup, but for the market and the services we provide. We’ve played on the margins [of fintech] for 10 to 15 years: now it’s time to really accelerate the things that will be transformative for our infrastructure and the way we deliver services.”
Shifting mindsetsThe appetite for greater collaboration with the financial powerhouse is also evident among many of Scotland’s fintechs — especially as the uncertain economic climate threatens to impact the flow of venture funding.
“The large companies have made it all too clear they need to embrace fresh, innovative thinking from outside of the organization but that has coincided with the fintechs saying, ‘Rather than trying to start a revolution that would allow us to take big bank customers, we can actually create very, very successful businesses by being complementary to those organizations,” says SFE’s Jones.
The posterchild of this win-win collaboration is FNZ, the investment platform provider to major financial institutions. It became Scotland’s first fintech ‘unicorn,’ commanding a valuation of £1.7 billion ($2.2bn) in 2018 (when its average employee age at the 15-year-old company was just 28). Today, Edinburgh-based FNZ adminsters assets of more than £400 billion ($522bn) for the likes of such as Barclays, Aviva, UBS and Zurich Insurance Group.
“The pandemic has been really good for getting people to think about doing something different, to realize that they can’t always choose the safe route.”
The call from some fintech leaders, who want to mimick that success, is for the financial institutions to be bolder. “The pandemic has been really good for getting people to think about doing something different, to realize that they can’t always [choose] the safe route,” said James Varga, CEO of open banking data specialist DirectID. “And financial services working with fintechs is a great example of this.
“It can’t just be about their innovation teams [working on] proofs of concept and side projects to get some interaction with fintech’s technology. We now have to find ways of bringing those innovations into production environments, at scale. If not, they are never going to have an impact — for anybody.”
James Varga, founder and CEO of DirectID
FinTech Scotland’s Ingledew agrees: “There needs to be a step change in the mindsets of the leaders of the larger enterprises in the way that they engage with innovation and move away from seeing fintech as a specialism confined to innovation hubs. Fintech innovation needs to be brought into the organization’s main operations and made pervasive,” says Ingledew.
Matchmaking modelsAs that underscores, collaboration may be high on the agenda but there are still many challenges for entrepreneurs when trying to connect to the wider ecosystem. A perennial issue, says Ingledew, is the question of where and how to connect within financial institutions to ensure the engagement is effective. To do so, he says, startups need real insight into what matters most to the financial services organization in question.
“Any large enterprise has key themes and problem areas that they know they need to address and prioritize. So a fintech may believe their technology is just what a large financial enterprise needs and may even generate some interest but nothing is going to happen unless the initiative is aligned with some areas of friction,” says Ingledew. Helping with that, FinTech Scotland maintains a constant dialogue with those larger organizations, identifying their ongoing priorities and problems. “By establishing that connection we can help to ensure that it’s not just collaboration by name, that it’s actually going to result in a trial, project, prototype or design around a particular problem statement.”
If big finance is their target, then fintechs also need to appreciate the complexity of the environment from the very start, he adds. “Any innovation opportunity has got to bring into play aspects of risk management, regulation, compliance and operational delivery.”
That is echoed by Callum Murray, founder and CEO of Amiqus, which provides staff and client onboarding technology, enabling financial services to transact and engage remotely.
In the past three years, there has been a definite shift by large enterprises from planning engagement with fintechs to actual engagement, he says. “Large enterprises do take a long time to move but they do move,” he says, “and when they do that scale can be quite fantastic. But the expectations that earlier stage companies have need to be set appropriately. They have to understand the ground rules: what are the requirements of a tier-one bank and what is the early stage company’s ability to meet them?”
Callum Murray, founder and CEO of Amiqus (Image: Stewart Attwood)
First published November 2020
And he adds: “Small companies can get to a certain point early with a great idea, raising some capital, but then they need to evolve the potential to the actual. They need to build in the various information governance and security standards and structures in order to be able to deliver a product to a bank. Because for the larger entities, it’s certainly viewed as very risky to err outside of the same old procurement routes,” says Murray.
“The good news is that the risk appetite has changed,” he says. “There are now many more examples of bigger banks and other financial enterprises engaging with smaller early stage companies and selling or using their products,” he says.
Scaling upThere are many benefits to forging such a partnership, but perhaps the greatest is the ability to prove that a startup’s offering can scale. “In coming together with a big enterprise, a fintech is going to get access to the capabilities, the resources, the customers and the route to market that they might take many decades to build themselves. Scaling is the big opportunity and those that have done that most successfully have worked in collaborative partnerships,” says Ingledew.
A prime example is FreeAgent, which provides cloud accounting to small businesses, freelancers and accountants. Following a partnership with RBS, more than 10,000 small businesses signed up for its service in the first year. That was proof enough for the bank which went on to acquire the company for £53 million ($69m).
“That’s a classic example of a three-man startup getting the right introduction into a tier-one full-service bank,” says SFE’s Jones, who had a hand in brokering the collaboration. “The relationship blossomed into a commercial deal and then, as they continued to build their capabilities and serve needs better, the bank decided, ‘We like this company so much, we’re going to buy it.’”
Key role for big techGiven that technology is the common denominator in all such partnerships, there is an important role too for established tech players. “Partnering with companies such as Fujitsu and BT can have an enabling role,” says Ingledew. That’s helped by existing enterprise relationships and means the startup can leverage the required level of trust often required to take a deal forward.
“One of the benefits of the involvement of a larger tech company is that you already have tracks laid down: in areas such as security, resilience and procurement. That helps to enable fundamentals that need to be agreed before a financial institution will feel confident about basing any new service or capability on a small business’s innovation,” says Ingledew.
And the benefits are two-way. “A global tech player may have an established relationship with a large financial institution but they recognize that they need to be continually evolving and developing that client relationship with innovation and added value,” he says — something a carefully chosen fintech partner can inject.
There is another upside to such a relationship too — global reach. A partnership between the major tech company and a startup in one ecosystem can be leveraged to take the technology solution to other markets in different parts of the world. “It provides a potential footbridge into those global opportunities,” says Ingledew. (See How tech giants can help to unlock the potential of fintech ecosystems.)
Behind all such activity is an awareness that today’s atmosphere of disruptive change demands broad and meaningful collaboration on problem-solving.
“The huge changes in the use of money and payments, the ways of engaging with customers, new digital products and much more have accelerated the need for open innovation and bringing a diversity of ideas,” says Ingledew. “And from both a social and economic point of view, more than ever we need different mindsets, people from different sectors with different backgrounds and ethnicities, from different generations to bring more creative ways of approaching problems,” says Ingledew.