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Part 4: What are the banks doing?

In terms of technological innovation the banks aren’t really doing much themselves. They are keeping a close eye on investment opportunities but the innovation tends not to come from within. 

It might seem odd that the innovation does not come from the instiutions with the most expertise and resources available but in fact this has always been the case. 

The strategy is not of innovation but of acquisition.
Banks get accused of not seeing the big picture, but this misses the point. I'd argue they see a much bigger picture, something called 'brand'.

Banks have always had corporate development teams to make what they call principal investments - strategic investments in businesses they can leverage and perhaps ultimately acquire and merge into the mothership (see previous post). The banks prefer to buy innovation because they don’t want to put their brands at risk pushing something that might blow up - they would much rather pay a premium once a market fit is found. Valuations for companies invesed in or acquired in the finance space tend to massive for this reason. That and bankers being hardened to zeros.

Technology is key to our financial system and banks have always invested heavily in it, but usually in infrastructure as opposed to web-enabled products. We haven’t seen any huge acquisitions in the fintech space, but a number of banks have made investments (e.g. BBVA/Madiva), as well as partnerships (Santander/FundingCircle) and a few incubator/accelerator programmes (Barclays/Techstars). The incubator model is interesting as for a relatively small upfront cost it allows banks to get a nose in at the sharp end of innovation, with lots of good coverage for their brand yet at arms length.

For details on recent activity check this out: FinTech 2014 wrap up

Banks are painfully aware that they need to get with the digital agenda (try googling "bank digital job”) - and for now they are heavily focusing on playing catch up, investing in updating their exisiting technology in all encompassing digital strategies. As an aside, poor guy who ever has that job…I would not want to be the one dealing with years of legacy code…from multiple systems due to constant M&A activity (the lego thing I was talking about)….with clients who have zero tolerance for failure….under the watchful eye of the regulators….and the press….and the public….who want blood!

One day they will though, and I wouldn’t under estimate how soon that day will come as they are full of very smart, highly motivated people and when a bank decides it wants something they go for it 110% twenty four seven. And when that happens expect A LOT of investment activity. 

Part 1   :   Part 2    :   Part 3   :   Part 4   :   Part 5
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