The world’s banks have poured billions of dollars into new technologies but many say their innovation strategies are falling short as concerns about cyber security, intellectual property rights and procurement hinder partnerships with fintech firms.
That is according to a study conducted by the law firm Simmons & Simmons, published on April 6, which surveyed around 200 financial institutions including banks and fund managers.
The law firm found that just 7% called their institution “industry-leading” on digital innovation and only 16% considered their collaboration with financial technology firms to be “highly effective”.
Angus McLean, a partner and head of fintech at Simmons & Simmons, said the report showed there was “clearly a massive level of insecurity” among companies in the financial sector over how innovative they are.
Three-quarters of respondents said they needed to improve partnerships with outside firms to improve on this. In reality, however, these partnerships often struggle, the report found.
The biggest barrier to successful collaboration with startups was cyber security, according to 71% of respondents. Alex Brown, partner and head of technology, media and telecommunications at Simmons & Simmons, said banks and asset managers were “genuinely worried” that the risk of sharing information with, or using tech supplied by, third parties could present the “next PPI-type scenario” and lead to millions being spent compensating disgruntled customers.
“There’s a perception that that it is more secure to have it all under one roof. But that is not necessarily the case”, he said.
Among the other hurdles were cultural clashes between fintechs and incumbents and issues around intellectual property rights; in both cases around 50% of respondents to the Simmons & Simmons survey flagged these as concerns, while only 19% said that their procurement processes were ‘highly effective’.
McLean said there are “very good reasons” why there are “these painful procurement processes” in place. “One of the reasons why these institutions innovate slowly is because they are worried [about] getting things wrong.”
Brown added that this fear often put a break on some of the partnering initiatives. “It’s a difficult trade-off for them to make between wanting to be innovative, wanting to partner with innovative companies, whilst at the same time making sure they comply with regulations.”
But Ben Brabyn, head of Canary Wharf technology accelerator Level 39, said financial services firms needed to “acknowledge that they are on the edge of a cliff and that they have to take the plunge” on innovation. He said it is not “good enough” for senior leaders to simply say ‘we do fintech’ and urged them to give permission to juniors to take risks on innovation.
A separate survey of more than 1300 financial services and fintech executives published today by PwC, found that more than 80% believed parts of their business were at risk from standalone fintech companies (SEE CHART).
PwC noted in its Global FinTech Report 2017 that financial institutions were learning to partner with fintech firms, with 82% expecting to increase collaboration over the next three to five years.
But the consultancy giant also noted the obstacles the likes of banks and fund managers can face when setting out to work with smaller, nimbler startups – including regulatory uncertainty and differences in management styles.
PwC said in its report: “Financial institutions labour behind a system of checks and balances that can stifle the innovation process, while fintech companies are generally able to adapt more quickly due to technology advantages and a lack of bureaucracy.”
Oliver Bussmann, the founder of Bussmann Advisory, former chief innovation officer at UBS and an influential voice in the European fintech sector, told FN in March that banks had not embraced innovation as much as they should have. “It’s still very much a 12-month focus,” said Bussmann of bankers’ mindsets. “Whatever has a revenue implication for 2017, that’s good – but everything outside that has less priority.”
He urged innovators in banks and other financial institutions to push when they believe change needs to happen in a certain area. “As the innovation head it is your job to see it when there’s something really big,” he said, adding “you want to fight for it”.
One bank that has been pushing ahead with internal investment in new technologies and external collaboration is JP Morgan. In his annual letter to shareholders this week, Jamie Dimon, the bank’s chairman and chief executive, revealed it had spent almost $10 billion on technology last year and also highlighted its continued work within the fintech community.
In the UK, HSBC recently established a technology advisory board that includes startup founders to accelerate the use of artificial intelligence, blockchain and biometrics to combat cyber crime and improve digital opportunities. It has also created a $200 million fund to invest in fintech startups, Samir Assaf, the head of its investment banking business, told FN in March.
Meanwhile, rafts of banks have teamed up with fintech startups to develop distributed ledger – or blockchain -technology.
Simmons and Simmons McLean admitted financial institutions were still finding their feet. “Banks have only really been looking at this properly since 2014, and they are still refining their strategy,” he said.
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