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A Large Bank as a First Mover? Been there!

FinTechs have made big headlines with some great initiatives that might have spooked banks. Payment platforms seem to hog the mindshare on that (ApplePay, AmazonGo). But so too have peer-to-peer lending companies made their presence felt (Lending Club).

The oldest fintech one can remember is possibly ING Direct which came about when the word fintech did not exist, in 1999! Fully 20 years ago!

Around the same time Egg was also launched. Both were pure online banks – no branches. Whatever they saved in administrative costs were passed on to customers by way of higher deposit rates. The extra interest offered made direct banking wildly popular and both brands became successes.

The oldest date one can casually remember the usage of the term fintech is definitely post-2010. That is how things evolve. Someone innovates. And it takes time for popular culture to recognize it by giving it a name.

But here is the interesting thing about the evolution of fintechs and these two early pioneers. Financial services is a trust game and fintechs often end up collaborating with big banks because it is not all that simple to garner trust outside the financial system.

The Magna Carta / Fintech survey of 2017 (here) shows that a large number of Fintechs have been bought over by Banks. Another large number have become strategic partners of banks.

From the fintech point of view, initial success brings size. Size brings regulatory issues into focus because a Fed or a Bank of England would not like to see large public deposits in a non-bank which is outside the purview of regulation. If something were to go wrong, every will want to know – what was the regulator doing while public money was being stolen! (Fintechs do want to become bank-like once they are at scale! (See here.)

So, there is a cold logic to fintech seeking warmth in the arms of Big Banking.

What about big banks? Well, their large size makes these Goliaths slow. Slow to innovate, slow to deliver on projects, slow to even approve disruptive projects.

For banks it is also a good strategy to watch the fintech space closely, see who comes up with winning ideas that win consumer support and write a large check (cheque) to buy up the entity, i.e pick-off the winner! For many startups being bought by a BankAm or a Citigroup for several hundred million dollars is a clear definition of success.

But then you do have companies of the size of Apple, Amazon and Google (the FAANGS, in fact) who suddenly are too large to buy! Instead, many of these companies can buy banks wholesale!

So, the challenge for banks is also to be entrepreneurial and develop solutions in the Agile format. DevOps is partly a move in that direction: to come up with solutions quickly. Banks would like to respond to a number of internal needs with micro-services: not with another large “change everything” project.

And banks, whose systems have traditionally been large, are also looking to be smaller, modular, and functionally compact on the technology and systems side. This could possibly lead to shorter approval cycles and small budget projects with a quick turnaround. The focus is on improving a specific dimension. Customer service is an obvious area, digitizing experiences is another; but so too, could things like risk and reporting do with quick solutioning.

And that is where Agile, Agile at Scale, DevOps and other initiatives at banks, brokerages and other financial services companies are headed. Mind you, some already think and work like this, notably JP Morgan Chase and Goldman Sachs. But many projects, both external (outsourced) and internal (change the bank) are in play, across the industry.

Back to ING Direct and Egg. Both are born at banks! So yes – banks can be first movers! Both came from a place where trust already existed. Both were successful. And Egg got sold by Prudential which promoted it in the first place, to Citigroup.

Between then and now, the dotcom bust (2000) happened and the Global Financial Crisis (2008) happened. These busts tend to slow down next-wave adoption. But it is seen repeatedly in history, that the excesses at the time of innovation lead to busts. When the dust settles, innovation resumes – this time with better business sense. And the innovation finds its rightful place as a wave, a trend, a paradigm, a success story.

Today’s fintechs build on those early successes. And in this case, the pioneers from large financial institutions were quite successful! So yes – Goliaths can be first movers too!

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