By Guillaume Rico, Director, and 
Arushi Tated, Senior Analyst, Chappuis Halder & Co.
Within the context of increased competition from new entrants in the financial-services digital market such as virtual banks and tech giants, incumbent banks need to find new ways to quickly acquire and retain clients. Offering digital-banking platforms is now a prerequisite but is not solely enough in view of user expectations set by daily experiences with entertainment or social-media platforms.
Traditional banks need to build up capacities by integrating new offers and making them immediately available to their customers without risking damaging their brand and regulatory exposure. This is the reason that today we see the development of ecosystems connecting banks, fintechs, marketplaces, other digital platforms into a single environment, with services available in a few clicks.
This new paradigm is clearly visible in Hong Kong, for instance, with the issuance of licenses for virtual banks with dedicated frameworks by the Hong Kong Monetary Authority (HKMA); amongst the eight virtual banks that have been granted licenses by the HKMA, most of them are mobilizing diverse ecosystems.
- Standard Chartered Bank, for instance, is joining forces with telco players PCCW Limited and Hong Kong Telecom (HKT) as well as ctrip.com—the latter being a leading provider of online travel services in China.
- Similar is the joint venture between Bank of China (Hong Kong), Jardines (a portfolio of Asian market-leading business) and JD Digits (the fintech arm of Chinese e-commerce player JD.com).
An example of the SME-banking ecosystem: restoring the bank’s position as a business partner
By initiating such ecosystems, incumbent banks can place themselves at the center of existing or potential customers’ financial journeys. Let’s take the example of small and medium-sized enterprises (SMEs), a segment under the spotlight: banks have been seen drifting from their central position as core business-partner-cum-financial-advisor and become progressively disconnected from the daily needs of customers, especially those who have very limited access to funding and inadequate services. The reality is different: SMEs spend a significant proportion of their time on non-business activities, such as banking, tax, bookkeeping and payroll management. More importantly, a lot of them are facing issues in accessing basic banking services due to the difficulty of assessing their businesses’ profitability and considering their risk exposures. A good example of the cost-versus-risk rationale is related to the onboarding process, through which large incumbent banks have trouble adapting to the specific natures of SMEs, while virtual banks have developed solutions.
mBank, for instance, offers onboarding under 10 minutes, whereas other actors, such as solarisBank, offer flexible identification through video calling from a registered phone. By driving a customer-centric experience, these innovations promote the acquisition of new customer segments as well as the retention of existing customers. By creating an ecosystem that goes beyond servicing the core financial needs of SMEs to integrating their broader needs, banks can put themselves at the centre of the SME lifecycle.
To understand in which direction a bank should position its digital ecosystem, it needs to identify its strengths in terms of products, services and client base and then define targets and objectives as an ecosystem, for example, one built for enhancing the adoption of Millennials or targeting the unbanked populations of East Africa.
In this concept of the financial-services ecosystem, we can identify three levels of services focusing on clients: core-banking services; augmented services, such as the consolidation of financial information from several sources, bank accounts, etc.; and extended services, which deliver additional offerings by integrating capacities from other industries, such as travel agencies, ticketing, car-rental companies or social networks.
To achieve the integration of these three levels, a wide range of fintech players are available in this partnership market, and it is not limited to financial-technology services but extended to other industries such as retail, telecommunications or entertainment. The right partnership will create a symbiotic relationship that will enhance the strengths of both partners without marginalising either. This partnership or integration is usually motivated by the acquisition of intrinsic value, such as a technological solution or key talent.
In order to identify the best target to enrol in an ecosystem, a due-diligence exercise should ensure that there is a fintech alignment with the project. As the main objective of the ecosystem model is to focus on the client, measuring the added value brought to customers by products and/or services should be the top priority. On a more technical front, two major aspects are paramount: technical openness and data-security levels that ensure privacy and regulatory compliance.
Same integration goals, different modalities
To achieve the best integration,a successful ecosystem can apply four different methods, depending on the needs and requirements of each partnership.
- Acquisitionsgive initiators the advantage of fast-tracking products to the market without inhouse development and of gaining complete exclusivity to perfectly tailor their products for their customers. This approach is particularly beneficial for initiators with limited inhouse talents or innovation cultures, but it requires a high-risk appetite and a large number of disposable resources for investment.
- Investments in fintech to create a strong partnership where priorities align. They can choose to set up their own independent venture-capitalist (VC) funds, invest through independent VC funds or make a direct-equity investment into the fintech partner.
- Software as a service (SaaS) consists of buying or subscribing to the underlying technology or product of a fintech firm, either through partner APIs (application programming interfaces) or open APIs. Partner APIs allow initiators to integrate fintech niche offerings into their own ecosystems, whereas open APIs give access to customer data to third parties in a controlled environment. APIs provide a unique opportunity for leveraging the strengths of fintechs with limited investment or liability on the part of the initiator. While exclusivity may not be guaranteed, a white-label partnership helps to maintain the initiator’s brand while providing extended offerings.
- Referrals enable each partner to maintain its individuality while helping to cover niche gaps and are particularly common in the lending sector, in which fintechs can provide quicker onboarding approval of loans. Referrals can be outbound, through which banks refer clients whom they are unable to service to fintechs; or inbound, through which fintechs refer a customer to the bank for services they cannot provide.
Once the integration framework is in place, we identify two main challenges to a successful operation. The first is that the technological architecture—through the connection of infrastructures from both parties, including data centers, networks and applications—could result in some challenges. There are several models of integration available for initiators, from migrating from legacy systems to agile and cost-effective cloud networks or a platform of open APIs to facilitate the development of new fintech initiatives for customers and reduce any frictions caused by different information-technology infrastructures. The other key challenge consists ofthe retention of talent. Loss of talent is a major risk in the integration of any startup, and this is also true in financial services. In an industry dominated by technology, talent is the biggest vector of value for a fintech, and it is critical to ensure that the best profiles do not fly away once the integration is underway.