Major technology companies are well-placed to be bridge-builders between fintechs poised for scale-up and financial services giants seeking a faster route to digital innovation. Ian Bradbury, CTO for financial services at Fujitsu, offers an insider’s perspective on big tech’s enabling role within the financial services ecosystem.
FINANCIAL SERVICES ECOSYSTEMS SERIES — March 2021
The rapid changes in digital finance over the past disrupted year have presented a huge challenge — and opportunity for change — to the giants of financial services. Banks, mortgage companies, insurers, pensions firms and others have had to dramatically accelerate their innovation agendas around all kinds of new and evolving digital services.
For many the focus has been on rapidly replacing face-to-face customer interaction with online and call center services, on delivering applications to support state-led initiatives such as government loans and mortgage holidays, and on evolving their online services to meet increased demand from customers for new applications and capabilities such as account aggregation and spending analysis.
In many cases, that has created some fresh thinking within the sector about how they can speed their digital transformation by taking advantage of the innovation flowing from the sector’s tens of thousands of fintechs. And key contributors to that new spirit of collaboration have been the major technology companies.
While their traditional role has been to provide core financial systems and services, these big tech players now see an opportunity to act as bridge-builders, dealmakers and innovation brokers between financial services giants (cautious of adopting early-stage technologies from companies with little track record) and the fintechs behind those (eager to access markets at scale but who struggle to make inroads into risk-averse, monolithic cultures).
As CTO for financial services at global digital transformation company Fujitsu, Ian Bradbury has witnessed firsthand how partnering and co-creation across those models can deliver mutual value — but only when the two sides can overcome substantial barriers, differences and some previous false starts.
“The need for genuine participation in wider financial services ecosystems is higher than it’s ever been.”
Over the past decade major financial groups have actively explored the capabilities of countless fintech products and services through pilots, trials and proofs of concept, but too few of these engagements have gone beyond ‘innovation theatre,’ says Bradbury.
“To date, there has been a frustration on both sides of not being able to do business — or at least not easily. In essence, the small company can’t find a way to position itself to sell to the big company and the big company simply can’t bring itself to buy from the small company,” he says.
Ian Bradbury, Fujitsu’s CTO for financial services
But the pressure — and the will — to resolve that impasse is there today, he observes. “Financial institutions realize that there are serious gaps in their service offerings — gaps that they don’t always have the agility, speed or expertise to fill in-house — and that is something that’s has been underscored by the pandemic. So the need for genuine participation in wider financial services ecosystems is higher than it’s ever been,” says Bradbury. (See How disruption is accelerating co-creation across financial ecosystems.)
“The problem is that even when they recognize a startup’s technology fulfils a major need — say a new identity verification service or a blockchain app — and they have the investment available to adopt it, they often don’t have the right internal mechanisms to bring that in and take it into production,” he adds.
The biggest blocker there, says Bradbury, is the high level of risk aversion — something that is perceived rightly or wrongly as flowing from the financial market’s regulators.
When elevating a new fintech technology beyond a pilot program, for example, that risk aversion may manifest itself as a requirement to see audited financial results of anything between three and 10 years. And that applies whether the fintech is self-financing and can show consistent profitability or is a startup that can point to a mountain of venture funding and a market valuation in the tens or even hundreds of millions.
Developing a mutual understandingIn essence, both sides need to find ways to lower the thresholds for engagement and develop much deeper mutual trust, says Bradbury.
“To understand how incumbents and fintechs can work together more successful, you need to recognize first that they approach the prospect of partnering from very different starting points,” says Bradbury, “with different project timescales and different objectives. Fintechs tend to be working in ‘dog years,’ cramming four to five years of normal activity into a single year; whereas financial services incumbents have traditionally linked projects to fixed annual budget cycles, with all the processes, proposal qualifications and checks and balances that go with that,” he says.
That means both seem to have diametrically opposite expectations and attitudes about the benefits that can flow from trialing and experimenting with new technologies. And that lack of alignment has been all too evident in one area: innovation hubs — the digital labs, garages, accelerators and incubators that were set up by almost every finance giant in the 2010s.
Experimentation zonesThe broad consensus is that innovation hub engagements have rarely been operated from a point of shared objectives. “Many startups jump at the opportunity to showcase their innovations to a potential big-name partner in a proof of concept or pilot,” says Bradbury.
“They crave the prospect of making a big sale to the insurer or bank behind the hub and of using that high-profile logo in future sales pitches. What they didn’t realize is that in almost every case there has been no route out of the innovation lab, no path to go into production. Even where the proof of concept has been successful, there has rarely been anyone involved who is ready to pick it up as a sponsor within the wider business.”
The contrast in objectives has been remarkable, says Bradbury. “The incumbent’s measure of success was not how many innovations they took to production or how many ended up in the hands of customers but how many innovations they were able to try out.”
As the innovation team at one large Scottish pensions company is reputed to have joked: “We support more pilots than British Airways.”
In such a situation, the big negative for fintechs has been obvious: a stream of unpaid work. “You’ve got fintechs burning their way through energy and venture capital for a month or more at a time, and then getting nothing out of it — rarely even a reference,” he says.
“There needs to be a route that says, ‘What we’re doing has executive sponsorship, a budget and a route to go-live.’”
With acceptance that that approach has not worked for either side, there are now intense conversations across fintech ecosystems about what change is necessary to enable fintechs and financial services giants to partner more freely and successfully.
For Fujitsu’s Bradbury, the essential evolution needs to be for large financial institutions to have a clear purpose and budget for engagement on external innovation and to align that with business sponsors committed to take the project, where demonstrably valuable, into production.
“The market incumbents need to start paying for experimentation — and committing beyond that,” he says. And both sides need to understand what it takes to actually do business.
“Removing opaqueness and reducing frustration is where this needs to go. There needs to be a route that says, ‘What we’re doing has executive sponsorship, a budget and a route to go-live.’ So it’s not just innovation for innovation’s sake. If not, financial services companies have to be more upfront and say this is pure experimentation that may go nowhere.”
Taking the pledgeThe frustration with the current dynamics — and the new imperative for collaboration spurred by the Covid-19 pandemic — surfaced in late 2020 with the launch of the Fintech Pledge by Tech Nation, the UK government-funded startup networking group.
The Fintech Pledge aims to commit financial services organizations to ensuring that “relationships with startup and scaling tech firms [who are] onboarding into their businesses are as smooth and collaborative as is possible.”
Signatories agree to provide clear guidance on how the onboarding process works and where a fintech project stands at any one point in that process, as well as to nominate a named point of contact who is available to provide regular feedback and guidance on how the engagement can be enhanced.
So far COOs, CTOs and customer services officers at some of the UK’s largest financial services groups have signed up to the Fintech Pledge, including those at Barclays, HSBC, Lloyds Bank, NatWest, Santander, Atom Bank, The Co-operative Bank, Nationwide Building Society, TSB and Virgin Money. (See Fintechs sense a new appetite for collaboration across financial services.)
Gaining reassuranceAlongside such initiatives, what has also become evident is that many of the hurdles stopping collaboration between fintechs and incumbents can be cleared by leveraging partnerships with established tech companies.
As an 85-year-old global technology player with revenues of ¥4 trillion ($36bn), Fujitsu is well-placed to assess and advise on whether a startup is likely to be perceived as bringing value to any of its major financial services customers and the different risk criteria, internal processes and stakeholders involved in getting there, says Bradbury.
“We can effectively create a different set of rules of engagement, including putting in place all the indemnity policies that would normally prevent a small startup from doing business with a financial services giant,” he says. And, when it comes to procurement processes, that can be in unexpected areas.
Bradbury points out that most banks make it mandatory for suppliers to have a child slave labor policy in place — but each with slightly differing requirements. The same goes for something like non-disclosure agreements. “When it comes to procurement, there is simply no standardization. So a startup may spend six months getting all the paperwork together for one bank, only to find that the next one requires different documents, in a different order, each with a different risk weighting,” he says.
“We’ve already enabled fintechs to do business with several banks where they would never fit the risk profile.”
In a growing number of cases, that results in major financial services organizations finding a route forwards by actively encouraging fintechs to partner with established technology firms.
“We’ve already enabled fintechs to do business with several banks,” says Bradbury, pointing to cases where banks have directed startups to Fujitsu because they were “never going to fit the bank’s risk profile.”
Importantly, by partnering the fintech is able to make use of Fujitsu’s Master Service Agreement and other established arrangements. “The guidance we saw one bank give to a fintech recently was: ‘We really want your tech but we just can’t do business with you. But we can if you partner with Fujitsu.’ So the big IT players can add significant value by being able to understand these different perspectives and provide a common language,” he says.
It’s a question of vouching for the fintech. “So if we’re backing someone, we’ll have looked closely into their accounts, checked their technology is robust and not likely to introduce extra risk to the financial services partner. That way we can stand shoulder to shoulder as we bring them to an identified stakeholder.”
“It’s assurance, it’s safety, it’s operationalization, it’s scale, it’s geographical reach and it’s supporting the wider ecosystem,” he summarizes. “But, importantly, it’s also an ability to triage fintech value propositions on the financial services company’s part.”
“Someone whose job at a bank is to scout [for new innovation] now gets over 100 pitches a day. So access to these stakeholders has become a much bigger issue for fintechs and one that larger tech companies can help with. The fact that we deliver the tier one services for the banks gives us access to the CTO, the CIO, the head of infrastructure and so on, but we only bring them opportunities we think they will value,” says Bradbury.
That access also helps to understand who is going to be most receptive to a fintech’s technology. “Many of these banks have 100,000-plus employees, and roles are constantly changing. So a fintech can be forming a relationship as part of a proof of concept but by the time it gets to the next stage the key person has moved on,” says Bradbury. Companies like Fujitsu have client executives whose raison d’être is to forge close relationships and track personnel movements and changes in influence, he says. “That is simply impractical to do if you’re a 20-person company — let alone across multiple financial service institutions.”
Size and experience also matter when deals are being struck. “A fintech might be negotiating with an organization which has 50-plus people in its procurement team and whose job it is to squeeze on price. So a fintech doesn’t stand a chance unless they have someone on their side who knows that world well.”
Shrinking time to successThe upshot of such partnering is accelerated time to market success. “I don’t think most startups actually understand the difficulty of doing business with a large organization, the standards and the hoops they have to jump through, the timescales they have to work to, the paperwork involved, the due diligence that takes place and the access to stakeholders they need.”
“So the first time they make contact they are not aware that getting to a deal on their own could take as much as three years. But by working with a larger partner who has agreements in place, it can be a case of signing a statement of work and then you’re ‘go.’ So you can compress three years into three months.”
That’s the value of reaching out to wider ecosystem partners who know the processes, the people and the underlying systems and can close the gap between fintechs and the giants of financial services, he says.