Why small companies provide big innovation for the finance sector
Incumbents in the financial services industry are investing in fintech start-ups in order to develop the next big customer-friendly innovation. It's an arrangement that benefits all concerned.
The financial services sector has seen a surge in innovation over the last 10 years. Take mobile banking, which has revolutionised personal finance; or contactless payments, which now account for the majority of debit card payments.
“There has been an immense service shift towards digital technology and, crucially, mobile technology in financial services,” agrees Emma Huntington, who leads Innovation and Venturing at Nationwide building society. “We in the industry have to use new technology to respond to the changing behaviours of our members, to meet, and hopefully surpass their expectations and needs.” Britain’s biggest building society has just launched a new £50m venturing fund that will see the mutual invest and partner with early stage start ups.
Start-ups are wells of innovation
Small businesses are home to very smart people who develop deep expertise around a particular technology, disruptive business model or customer solution — we want to tap into that.
Every day, bank and building society employees in branches, contact centres and back offices are constantly discovering innovative ways to improve their systems and processes. But in the new world the pace of change has increased. The standards are no longer set just within the financial services industry – so to ensure that established organisations continue to deliver against the pace of change they must look for new partners.
This is why increasing numbers of financial services players are partnering with fintech start-ups: small companies who have ideas for transformative solutions, but need resources to either get them off the ground or develop them in any significant way.
Partnership is a two-way street
“Small companies provide a well of innovation,” says Huntington. “They are home to very smart people who develop deep expertise around a particular technology, disruptive business model or customer solution — and we in the industry want to tap into that.
“We also want to learn from them. We want to know how their innovations work and how they might benefit our customers and members. In exchange, we'll support them and help them to become more successful businesses. The best way to optimise these partnerships is through collaboration, ensuring that the benefit really is mutual.”
For example, Nationwide Building Society, which, as a mutual was founded to improve the living conditions of ordinary people, is investing in acasa, a financial platform that supports tenants living in shared accommodation. But the investment is more than money; the building society will provide an experienced member of staff, guidance and expertise to acasa.
This is the first investment of the society’s venturing fund, which will explore new partnerships that will deliver innovative products and services that could provide real benefits to the Society’s 15 million members.
Collaborations must be chosen strategically
The financial sector is always hungry for the next big tech idea, but it's important to invest wisely, warns Huntington. Start-up collaborations and partnerships have to be chosen strategically and undergo a strict due diligence process to ensure that both parties will make a good 'fit'. “Any fintech start-up needs to be assessed against a range of factors. For instance: does their innovation make sound business sense? Is it going to work? Will it be scalable?”
However, if this arrangement is approached with care, Huntington is excited about the future of fintech. “If we put our customers and members at the centre of everything we do, I think we'll see some amazing innovations – large and small – over the next 10 years,” she says. “That's what I'd like to see the industry do — and what I think will happen.”