Navigating a way through a bank’s procurement process can kill a fintech start-up – or dampen its innovative spirit. Joy Macknight explores the ways banks are changing their rules of engagement specifically for this community.
The interaction between the banking industry and the fintech community has matured over the past two years, changing from competitive to collaborative. Banks have reached the conclusion that fintechs, with their innovative ideas and agility, are vital in a fast-developing digital world, while fintechs can see the value in tapping the mass customer base and trust that banks have built up over decades.
“There is a lot of overlap where we can work well together in the middle,” says Lubaina Manji, director of open innovation and Barclays Rise centres worldwide. “That has been the aim of Rise – to co-create the future.”
A sea of due diligence
A survey by ACI Worldwide and Magna Carta, published in the 2017 Fintech Disruptors Report, reveals that about 80% of banks believe partnership with fintechs is a viable, even essential, path to the future of financial services delivery.
Similarly, PwC’s Global Fintech Survey 2017 found that 82% of incumbents expect to increase their number of fintech partnerships in the next three to five years. The survey found 45% of participants already partner with fintech companies, up from 32% in 2016.
However, considerable friction persists at the interface between bank and fintech, particularly in the procurement process, which includes legal, compliance and IT security. As heavily regulated entities, banks are responsible for protecting their customers and, essentially, ensuring a stable and secure financial system, all of which results in onerous and complex on-boarding practices. But the time and effort it takes to wade through the document-heavy procurement process can overwhelm – and even kill – a small start-up.
Ian Chan, partner, exponentials and innovation leader at Deloitte Canada, says: “The gap between the speed [needed for fintech engagement] and a bank’s traditional due diligence path is a challenge. Therefore, if a bank wants to play in this space, it needs to make a conscious decision to increase the velocity of the procurement process.”
Some banks are searching for help to revamp procurement, according to Angelique Mohring, founder and CEO at GainX, an innovation strategy management software start-up. “Banks are recognising that they must improve their procurement process to be able to quickly leverage innovative opportunities in the market. Some still have a nine-month on-boarding process, which is suicide for banks, in my opinion, as it opens the door to competitors to bring cutting-edge, innovative solutions to their customers faster,” she says.
The start-up perspective
Fintechs face a long and arduous journey to get their technology inside a bank. John O’Hara, CEO at Taskize, which helps back-office staff work more efficiently across banks, outlines the process. First, a fintech must find someone inside the bank who wants the product and can build a business case. Then it needs to find a suitably strong internal sponsor to push it through the vendor management process.
The final step – before a bank commits expensive resources to on-boarding the start-up – is the security questionnaire. “A fintech must have a strong stance on security, [and be] able to meet the stringent standards that banks hold themselves to. This forces these young firms to grow up very quickly,” says Mr O’Hara. “When, or if, it gets past the security and technology audit, then the fintech encounters the legal process – and that is a whole new journey.”
Philippe Mauchard, co-founder and chief bridge officer at Brussels-based fintech platform B-Hive, says: “If all goes well, then a fintech will be complying with the same procurement processes as the IBMs of this world, where it will be submitting numerous documents, ticking security boxes, providing credentials, etc. But if it doesn’t go well, then it is all the above plus the highest scrutiny and doubt as to whether this small company can do what it claims.”
Typically, the due diligence process would involve examining a potential vendor’s balance sheet, track record, funding history, etc. But these metrics may not be available for fintechs or, if they are, they will look completely different to a mature vendor’s. Either way, fintechs would not pass a standard due diligence test, which gives credence to their complaint that such requirements are not relevant for their size of business.
Fintechs are also under immense cashflow pressure to generate revenue, which a long, drawn-out procurement and on-boarding process only exacerbates. “Chatting with banks is not our goal as a fintech – getting into implementation mode is,” says Andre Casterman, chief marketing officer, at Intix, a software start-up that helps banks and corporates access and track data surrounding transactions.
Mr Chan agrees that the most important step for a fintech is to get its solution into production – and that applies to the bank as well, assuming the fintech is solving a particular pain point. “Getting that friction solved as fast as possible has to be the key performance indicator,” he says. “We call it ‘days to production’, but this concept isn’t yet widely accepted in the industry.”
A change in progress
The crux of the problem is that the laws of procurement are developed by large organisations that are not designed for innovation. As David Dab, chief innovation officer at ING Belgium, says: “Banks have policies, rules and habits embedded in functions such as procurement, risk, compliance, etc. These functions can kill innovation because they act like an immune system – effectively protecting the organisation. So they need to find different ways to work with fintech start-ups to enable innovation.”
Mr Dab believes fostering radical internal change requires experimentation. “It is not about setting a new policy and then applying it, but learning through hitting roadblocks and exploring new opportunities to work with start-ups,” he adds. “Banks need to start talking with procurement, risk and compliance to find ways to circumvent those obstacles, which will in turn change the way the organisation works.”
Deloitte is helping its clients become more agile in procurement, according to Louise Brett, UK fintech lead at Deloitte. “There are two types of response from banks: one is an overall improvement to make procurement much more agile, reflecting the move to agile working in the rest of the bank. The other is recognising that the bank needs a second process for fintechs that has less stringent criteria and moves much faster than [it has done] traditionally,” she says.
HSBC, for one, is currently working on streamlining its procurement process for fintechs, according to the bank’s head of digital, UK and Europe, retail banking and wealth management, Raman Bhatia, who is well versed in the challenges start-ups face. Before joining the bank three years ago, he was a vice-president at HouseTrip, a venture-backed online platform for holiday rentals, which was sold to TripAdvisor in April 2016.
“We are tailoring the various assessment and evaluation processes to the type of engagement we will be having with them – to foster an ecosystem where we can work with fintechs more quickly and effectively, while making it easier for them to work with HSBC,” says Mr Bhatia, who adds that the bank is looking to pilot and roll out this new process soon.
Citi is also modernising its procurement process. Speaking on a recent panel at Citi’s Tech for Integrity demo day in Dublin, CEO of Citi Fintech Yolande Piazza addressed the procurement issue. “Banks are used to integrating with large, complex organisations but if we want to be able to run at the pace of a true agile organisation – and I say agile from business all the way through to implementation – we must change our process. Citi has analysed every step, department, looked at what could be automated and what could be run in parallel to improve our ability to on-board fintechs, so we don’t lose momentum half way through.”
Lighter touch
Barclays has created a light-touch approach by establishing a ‘control tribe’, which brings together legal, compliance, control, data privacy, financial crime, information security and so on. “We have a quick tick-box exercise for POCs [proof of concepts] where the fintech doesn’t have access to customer data or the bank’s systems. The ‘control tribe’ comes together to question the start-up and its sponsor within Barclays about the proposed POC to ascertain the level of risk,” says Ms Manji. “Most of the time they conclude they don’t need to be involved at this early stage.”
As a result, the bank has reduced a six- to nine-month process down to a few weeks and a 92-page legal document down to just two pages, mainly non-disclosure agreements. “We have adapted our processes to enable experimentation and a quick response by creating clear guidelines for each stage of engagement,” says Ms Manji. Following a successful POC, the fintech will most likely go through a longer procurement process but the process is made easier by collecting the type of information needed for advanced control and compliance during the POC, she adds.
ING has also taken concrete steps to reduce the procurement cycle. Mr Dab gives the example of shortlisting three start-ups to run POCs following a scouting trip in September and by January two were in production.
“Other cases have taken longer but much depends on who is involved in the bank, the complexity of the technology, or if an important legal issue arises,” he says. “It may also be a lack of sophistication on the part of the start-up. Some don’t fully understand the process and the number of bank stakeholders that they need to manage through the process.”
Seeking best practice
To educate start-ups, the ING Belgium Fintech Village provides a masterclass programme where procurement, risk and compliance explain what it means to work with a regulated entity. “It is also useful for bank staff to help them overcome their prejudice and see that start-ups are professional people, some of whom previously worked in big banks. All this contact helps both sides to work smarter and better,” he says.
Ms Brett thinks this is an important development. “Banks are getting the right people together – procurement, risk, compliance – and developing a new set of criteria to reduce the procurement lifecycle,” she says. “But we are just beginning to see this and, to date, I haven’t seen a standard best-practice fintech procurement process.”
GainX has helped some banks revamp their procurement cycle and Ms Mohring’s advice is to find the balance between bringing in new innovative opportunities and containing the risk in small minimum viable product tests. “Banks need to create a transparent and visible place where they can experiment quickly and assess the risk,” she says. She also suggests there should be an ongoing relationship between those responsible for innovation and growth and those responsible for risk management.
Ms Mohring has experience on the other side, as a start-up selling into the banks. She draws attention to one large bank that invited GainX in, put it through a short procurement process and she had a cheque in her hand in eight days – impressive by anyone’s standards. “The bank was clear that if the trial went well, then it would put us through a longer procurement process – and even that only took 45 days,” she says.
Can innovation grow in a lab?
While many large banks have launched accelerators and/or innovation labs to ease the friction between banks and fintechs, the jury is still out regarding their impact on the incumbent institution.
Ms Mohring, for one, does not see a correlation between these spaces and internal changes, mainly because many banks come to GainX because they are having a tough time getting ideas from labs/accelerators absorbed back into their business. Mr Casterman is also critical of the labs, and questions whether the investments would instead be better placed in real implementation.
However, for banks that have launched these initiatives, the lessons learned are plentiful. For example, when Barclays kicked off its accelerator programme powered by Techstars four years ago, the main aim was to help fintech entrepreneurs grow. But within a year, Barclays flipped it to being about bringing innovation into the bank, as well as helping the fintech to scale, says Ms Manji.
Since then, the bank has run nine cohorts in London, Tel Aviv, New York and Cape Town. “It is a good way to take our challenges and procure the right companies to help us solve them, while at the same time accelerate ourselves internally. Also, instead of thinking about faster horses, we have an opportunity to question whether we should be building something a completely new service for the future,” says Ms Manji.
Mr Dab believes that the ING Belgium Fintech Village 16-week programme helps procurement and other departments become nimbler because it can act as a forcing house. For example, in 2016 the bank wanted to run a pilot with Delio, a UK-based investment platform, with real clients, so it needed to go through the implementation process with risk, legal, compliance and so on, that would normally take three months. “But the programme was over in three months, so we needed an answer in a week – they had never seen anything like that,” he says.
The teams rose to the challenge and took just three weeks to give approval. The experience encouraged legal, risk and compliance to work at a very different speed than what it was used to and with a different mindset. Mr Dab says: “The programme has widespread visibility up to the CEO, so everyone wanted to make it a big success.”
Nothing for free
When defining a metric to track banks’ progress when working with fintechs, Mr Chan purposely chose the term ‘days to production’, instead of ‘days to POC’. “There is no value in measuring days to POC,” he says, mainly because a POC takes a lot of energy and does not necessarily lead to the bank procuring a fintech’s technology.
In addition, there seems to be widespread propensity to equate POC with ‘for free’. “Many banks still argue that if a fintech wants access to their data and customers, then they should be able to use their software for free; and if it works, then they will move into a commercial conversation. The banks feel they are bringing assets to the table,” says Ms Brett. However, as highlighted, fintechs are usually facing severe financial constraints. She reports that more established fintechs are now pricing POCs – often starting relatively cheaply and increasing as they have become more successful.
Interestingly, she raises a new area of concern for fintechs: who owns the intellectual property if the product/solution is developed together? “Banks are feeling their way through that with fintechs at this early stage,” she says.
ING’s simple ethos is based on the belief that this is a long-term strategy. “ING is building a reputation in the market that we mean business,” says Mr Dab. “We aren’t in business of doing POCs and neither are start-ups. We are in the business of doing business, so when we find an interesting company and match it with a sponsor we make it clear that it is not just about doing a POC for entertainment. There must be a real problem and we need to check if the solution works, as well as the willingness and the means to go forward to procurement.
“If a bank knows, for instance, that it doesn’t have the budget even if the solution works, then that is bad for the start-up because it will burn through its cash,” adds Mr Dab. “It is also bad for us in terms of wasted resources as well as our reputation in the market. There are many institutions that are ‘fintech tourists’ – but they are quickly known in the industry. The venture capitalists know them and start-ups don’t want to see them anymore.”
According to Mr Mauchard, there is a movement of venture capitalists who advise more mature start-ups to refuse POCs. “I also encourage fintechs not to jump at a POC, but to ascertain the bank’s commitment. There should be a commitment from the bank that if the POC materialises as it should, then a contracting phase should follow,” he says.
Likewise, Mr Dab advises fintechs to test a bank’s commitment upfront. “One way is to ask tough questions; another is to make sure that the POC is a paying one because no one likes to pay unless there is a good reason and they also tend to be much more rigorous when they are paying for something,” he says.
He stresses the importance of defining what success looks like and what will happen if the POC is successful. “That discussion needs to happen before doing the POC,” he says. “Too many start-ups underestimate the importance of clarifying this upfront, or don’t dare to ask those questions.”
Ms Mohring is clear that giving away GainX software is not an option, but many banks will still push for it. “Hugs are free, but software is not,” she says. “If a fintech is just coming to market and needs traction – trying out its ‘ugly baby’ – then, yes, give it away for free because the feedback is invaluable. But if a fintech has traction with other banks, absolutely not.”
Collaboration between banks and fintechs is coming to fruition, as illustrated by the many impressive entries in The Banker’s Technology Projects of the Year 2017 awards. Read about the winning entries in the August issue of The Banker.
