Why banks and fintechs should partner to be more efficient
« Most smart people in the world don’t work for us ».
This insight which is attributed to the computer scientist Bill Joy is a simple fact. It’s a matter of numbers: Even if you hire legions of people you, as a single firm, you will never have the majority of smart people working for you. But how do you get this majority of smart on board? How do you engage them? You can’t hire everyone, can you? In the end companies exist for a reason: organizations establish clear boundaries to make sure that things work smoothly inside and that any interactions with the outside follow clear rules. Logical reasoning therefore demands it that a firm cannot just hire everyone to work for this very company. Moreover, where would companies end up with their trade secrets and intellectual property if everyone works for them? This question is all the more important in banking as banks are entrusted with highly sensitive data of their clients.
So how to resolve this dilemma? In the beginning of the millennium Berkeley professor Henry Chesbrough pondered this question in depth and came up with a solution: Open Innovation. According to Chesbrough Open Innovation denotes “purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively”. In other words, he suggested opening the organization’s boundaries to let ideas flow across them. If there is an idea outside the firm, so his reasoning, don’t dismiss it as not invented here, but take it seriously and put it to purpose inside the firm, if it is of value. On the other hand, if employees of the firm have an idea they can’t pursue inside the organization, why not look for external partners to monetize it?
While this concept looks nice on paper, it faces significant difficulties in the banking world. Already a few years back I reached out to seven Swiss banks and asked them why they hadn’t adopted this concept in their firms. It turned out that mainly three hurdles hampered the adoption of Open Innovation in banks: a lack of organizational culture that fosters innovation and risk taking, missing knowledge of innovation management techniques, and a lack openness towards suppliers and clients.
Jointly become more efficient
If we look at Fintechs they could bring exactly these three attributes to the table: firstly, an organizational culture that champions innovation and is sufficiently risk prone, secondly, innovation management techniques, such as design thinking, the business model canvas and the agile methodology, and thirdly an open posture towards suppliers and clients as they are typically less hierarchical and often closer to their clients than pure bread financial institutions. At the same time banks could bring to the table what Fintechs are typically lacking: in-depth business expertise, a long-established and trusted brand, sales channels and funding. In this way true win-win situations could be created.
Being oftentimes highly complementary, banks and Fintechs should definitely cooperate to become more efficient. Luckily this has also dawned on banks in the meantime. As a result, we can now observe an increasing number of innovation labs being setup by banks. These innovation labs reach out to players in the Fintech world with hackathons and challenges as well as incubator and accelerator programs. Moreover, dedicated service providers such as Fincrowd in Switzerland are now available that can facilitate Open Innovation for banks. Given these developments I’m positive that banks and Fintechs will increasingly find each other to jointly become more efficient in pursuing their common objectives. |
Dr. Patrick Schueffel
Professor Institute of finance
HEG Fribourg