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Banks must rise to the digital challenge or risk withering on the vine

by internationalbanker

By Ben Robinson is head of strategy & innovation at Temenos and Guillaume Dubray is the managing partner at Polytech Ventures

An innovative fintech incubator in Switzerland will help banks to grab hold of the digital revolution and prepare for the future, write Ben Robinson and Guillaume Dubray 

There’s probably never been a more challenging time to be a bank. After years of reliable profitability, 2008 brought a brutal end to the good times. Those that survived are now facing unprecedented competition as processes become digital and non-banking competitors move into profitable activities such as point of payment, forex and unsecured lending. Digitization across the industry is changing the dynamics of banking. 

Some of these new competitors are successful, global, digital companies eager to extend their businesses and their entry must come with a warning. Francisco Gonzales, BBVA’s executive chairman, has said: “Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter a highly regulated, low-margin business such as banking. I disagree. What is more, I think banks that are not prepared for such new competitors face certain death.”

Everywhere you look banks’ inherent conservatism is leaving them open to slick new competition. And a single bank’s R&D program is never going to be enough to cope with this growth of competition and huge digital change in every part of the sector. What is needed is industry-wide collaboration and investment to spot, develop and accelerate innovative technology that will enable banks to compete in every function, service and product.

This is why banking software specialist Temenos has joined forces with start-up venture capital specialist Polytech Ventures to make it easier for banks to understand and embrace the need for R&D and innovation. Fusion, the Swiss Fintech Factory, combines our experience in banking IT and venture capital, and is the country’s first incubator dedicated to fintech. 

Switzerland is the perfect place for this thanks to its rich banking heritage. It has established business networks and experience, as well as world-class research centres and universities. Launching this winter and up and running in the autumn, the incubator will provide a complete ecosystem for start-up fintech companies to develop and thrive, bringing together different communities to make truly successful businesses. 

Access to funding will be facilitated by Polytech Ventures, while Temenos will provide mentoring and sponsorship. Companies in the incubator will enjoy regular meetings, thought leadership, a board presence and shared knowledge as well as dedicated funds and manpower. They will be able to tap sponsors’ and backers’ networks for further funds, feedback, development and customers, helping them to develop faster and better. 

The incubator will nurture the best fintech start-up ideas allowing banks to face not just the competition, but to develop their own businesses. With the right innovations, what’s to stop them from doing an Amazon or Apple and extending their offering beyond their own sector – becoming a portal for music, books and other products and services? 

It all seems a bit removed from bank responsiveness at the moment. Take mobile. According to consultants McKinsey & Co, in the US more than half of all mobile phone subscriptions are for smart phones and 1 in 3 of those are used to make payments. Furthermore, the average mobile customer interacts with their bank at least twice a day and these transactions represent more than 80% of customer/bank interactions. 

But banks have woefully underinvested in this area. A study by Accenture revealed that only 20% of US banks see mobile as a focus for development and investment. The result: banks all too often have shallow digital offerings covering only basic customer transactions, leaving the way open for nimble start-ups and non financial competitors to step in and scoop up the business. 

This has to change. Mobile, social media, the cloud and big data deliver new products and services to the global economy almost daily. And there’s more to come – the internet of things and application planning interfaces (APIs) are both set to revolutionize how we live and how banks bank. 

Research group Gartner predicts 5bn devices will be connected to the internet by the end of this year – and that’s only the start. In a banking context, that’s a massive shift in the way customers will demand service. It means more real-time transactions, more than banks can hope to cope with as things stand. 

The growing use of APIs in banking offers significant room for innovation. Banks can offer APIs to partners so that their products can be sold via new channels. But, more interesting is banks consuming partner APIs, developing a marketplace for banking services extending beyond their own products. This could see them distributing a wide range of products according to customer tastes – and potentially stretching well beyond just financial services – without losing the point of interaction and getting cut out of the game. 

But innovating isn’t just about facing up to the new competition – there is the prospect of digital change delivering additional revenue. McKinsey suggests that retail banks which adopt a full digital program can lift EBITDA by more than 40% in the next five years. Such investment will allow banks to fully leverage their existing business models and offer a full, competitive and profitable service to customers. 

The incubator ecosystem will allow banks and other financial services players to spot, nurture, develop and mentor new ideas and be first in line to reap the rewards – it will put the banks back at the top of the game. But that’s not all. Its success will re-establish Switzerland as a forward-looking financial centre to rival New York and London, where similar incubators are already up and running. It will be good for banking, good for Switzerland and good for business.


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