This episode examines where, by working with financial infrastructure partners, relationships and service delivery between Banks and their business customers can be greatly improved. It covers the hurdles that legacy systems present for digital transformation, the benefits that financial infrastructure partnering holds for business relationships and customer experience and how banks can disseminate what should be built in-house and where to outsource to partners. Our guests for this episode include:
1/ Gary Wright – Head of Research, Finextra
2/ Søren Skov Mogensen – Chief Growth Officer, Banking Circle
3/ Olivier Guillaumond – Global Head of Innovation Labs and Fintechs, ING
4/ Steven Marshall – Chief Partnerships Officer, Crown Agents Bank
Russell Goldsmith [00:00:05] Welcome to the Knowledge Circle podcast from Banking Circle. My name is Russell Goldsmith and in this episode, we’ll hear the highlights from our webinar that asked the question, ‘Are Financial Infrastructure Partnerships the Future of Banking?’ Our guest panel included Søren Skov Mogensen, Chief Growth Officer, Banking Circle, Olivier Guillaumond, Global Head of Innovation Labs and FinTechs, at ING and Steven Marshall, Chief Commercial Officer at Crown Agents Bank. And finally, the panel was hosted by Gary Wright, Head of Research, at Finextra who we’ll hear from first.
Gary: [00:00:37] Let’s move swiftly into the discussion around the financial infrastructure partnerships that really are the future of banking. So, can I ask each of you in turn, starting with Søren, to give us some background and some contextual remarks on the subject?
Søren: [00:00:53] In November 2020, Banking Circle spoke to just about 300 C-suite decision makers at banks across the DACH region, the UK and the Benelux. And we learned quite a bit from that. I’ll try to give you a synthesis of it as an introduction from our side. Now, we all know that banking is heavily impacted, of course, by legacy systems, and that those have been a major roadblock for accelerated digital evolution. And we all know that banks have been working for years with third party providers to achieve a stronger digitalization in their businesses. And we’ve recently seen German media paymentandbanking.com launch this amazing map of banks, selected banks in Germany against fintech partners, and how that has stacked up. And it really is becoming a rich landscape in most regions. But what we’re seeing now is an increase in that. We see almost half of the banks that we’ve been in dialogues with saying that existing IT infrastructure and financial infrastructure is one of their three biggest internal challenges. We see them saying that the main IT priorities for the next 6-12 months are improved data security, improved data dashboards and improved customer experiences and how most of them have actually gone back and changed their back-end agenda and their backend infrastructure plans to make sure that they have something that’s tailored and ready for the new circumstances due to COVID 19. So, we just generally see many banks be able to change their agendas, adapt to the situation we’re in and hook up more and more with third party providers as part of their agenda to adapt to the circumstances they’re in. That’s some of the conclusions that we’ve taken out from those conversations and interviews.
Gary: [00:02:47] Olivier, from your point of view, from the bank’s perspective and from your own observations on the market, please, let’s hear from you, if we may.
Olivier: [00:02:56] I think each word counts in the title of this session today, right? So, partnership in itself, it’s a journey, right? So, it’s a long journey. We started off the journey I think seven years ago at ING, and it’s still complicated. And it’s just a means to an end. So, the purpose is not to partner. The purpose is beyond that. It is to serve a customer. It is to serve a colleague. It is to accelerate. So, there are many reasons why someone might want to partner, but in the end, it’s about the purpose that you want to achieve, whether partnership is the right way to get there. So, at ING, we recognize the partnership could be a good answer in many instances, yet not the only answer. And it starts with, at least from our perspective, having a clear view on when it makes sense to partner, choosing the use case where partnering is the way to go as compared to why it’s not the way to go. Also understanding that to really make it a success, you need to change your DNA. So, let’s say the future of the enterprise is essential if we are to be open to partnership and really make the impact that people are entitled to. So, at ING, this is what we embarked on seven years ago, and this is where it starts from the top to really influence, that we open for collaboration. So really to the end and for a huge impact for both sides. So, it’s about having that consistent strategic direction and having the DNA that goes with it, understanding that it’s complicated, and understanding the skills and the mindsets that you need to have in order to make those partnerships successful. And when it comes to financial infrastructure, which is just a part of the entirety of the bank, this is more important because this is your foundation based on what you can actually roll out as a new value proposition to your customers. So, it’s even more essential to have a clear view on what is the foundation on top of which we want to build a roll out a new customer proposition and to have that in a short term to market. So an essential topic and very much looking forward to sharing what we have learned along the way and hearing my partner’s view on this.
Gary: [00:04:59] Olivier, thank you very much for that. I think it’s quite an important thing to say that it’s a sort of never-ending journey, almost it’s a continuous way of doing business in a new fashion organisationally, culturally and from a technology perspective. So, thank you very much for your opening remarks. So, Søren, let’s go into a more detailed discussion picking up on some of your points, I suppose it’s inevitable that digital transformation is part of what we’re all doing, but there are different ways of approaching it. I’m not saying one’s right or one’s wrong, but there are different ways of doing it. So doing, you can take different views and there are different hurdles and obstacles to overcome. So, what are some of those challenges that you have moving to a digital world? And I think that picking up on your points there, what impact do you see the pandemic has done in terms of accelerating the way that people are going? Because it is changing customer behaviour and it is demanding that we look at different ways of doing business.
Søren: [00:06:00] Thanks Gary, I think I’ll start with the hurdles and then I’ll sort of drill into the pandemic part of the question then. What I see in terms of hurdles in digital transformations can probably be broken up into three. First of all, the hurdle of having a clear scope, a clear line of sight as to how to actually run a digital transformation. What is it we want to transform? How do we want to do it? What’s in scope, what’s not? What does good look like? How ambitious should we be from the outset? That kind of clarification sounds easy, but it’s a main hurdle, I’d say. Secondly, there’s an organizational dimension, making sure that people, and resources are stacked up against the scope, that there is organizational alignment not only in the engine rooms that really operate and really run the digital transformation, but in the support functions, the staff functions and indeed in the front line. And then finally, backend financial infrastructure is a main enabler. I remember when I was a consultant at McKinsey advising banks on this topic, we would tell that about 70% of the efficiency you would get from digitization does not come from a slick user interface. It certainly comes from the back-end efficiency into it. Now that’s probably the breakdown of the three main hurdles, I would say. Now around all those dimensions, there’s a big A word, the agility. Now agility is about being agile to change when the customer or the circumstances change. And that probably comes through the second part of your question, Gary, about how COVID has impacted things. And COVID certainly has been a change. Covid certainly has accelerated the change and the evolution. As with any evolution, the winner might not necessarily be the strongest, might not necessarily be the fastest, but it most likely will be the most adaptable or, if you will, the most agile. Now, as mentioned in our survey, we found that two thirds of 300 questioned banks said that the pandemic has caused them to change their infrastructure plans. And we found that half of them have partnerships or plan to work with a partner in the near future. And that means that there is a readjustment for the most part. And we believe that those banks who do step back, who do think about their agenda from a fresh start and who do proactively make changes, will be the winners in circumstances like this. We especially believe that those who focus ruthlessly on their core will win. We can see that when banks reach out to us to speak to us, those who typically come with a very clear idea of what their core is, it’s typically their customer interface, it’s typically certain parts of their proprietary infrastructure that they couldn’t possibly let go and then they sort of ask for, for financial infrastructure services. And when they do so, be it virtual IBAN accounts that they offer for their corporate customers in non-core geographies or be it downstream correspondent banking where Banking Circle delivers faster and cheaper solutions that fundamentally comes from a need to sharpen the focus on the core and work with third party providers on infrastructure matters that indeed can be eligible for such collaborations. And I believe that readjustment, that adaptability will be essential to banks during a global pandemic like the one we’re in.
Gary: [00:09:39] Olivier, just very briefly, two points. How do you, as a large organization, consume the impact of the pandemic? Because you’re already kind of on a journey of doing digital things? And then another point I just want to pick up on is the definition of core. What is it that you think generally and possibly already done is the bit that is the in-house crown jewels that you want to look after yourself, as they say? Where do you think the play is in terms of working with the smart, agile third parties that are out? Is there some common ground, do you think?
Olivier: [00:10:21] Great questions Gary. Maybe on the pandemic, maybe a few things, I think we all realized that even though tech and digitization is essential, and we’ll come back to that in the end, human capital is still our highest asset, and preserving the health of our colleagues and our clients is the number one priority to operate any business. I think it was a very important reality check for all the organizations, including ourselves, and that’s obviously our core priority at the moment, right? So that’s number one. I think number two, obviously, has really rapidly accelerated the move towards in the payment industry, mostly in the payment industry toward touchless payments. So, we’ve been working with our colleague banks in Europe to provide touchless payment everywhere and the volumes have been within IGF time seven during this pandemic. So, it’s just a revolution when it comes to payments. And obviously, we’ve been spending a lot of our time to be very close to our clients retail, SME and also banking to help them with payment holidays, looking at their loan situation, providing them support wherever we can. So, from a pure, I would say digitization standpoint, we already embarked on the journey before, so we didn’t you know, for us it was not an acceleration, it was a continuation. However, it also means that even more pressure to stay on our means, because it’s also attacking our means to change. So, it’s even put even more importance in moving into realizing the business case behind this digitization. But it didn’t give us more means, so it’s more important. But for us it was really well on the way, so we just keep going and understanding the importance of it. On your second question, what is core? And it’s a very interesting one because our understanding so far is that the core of the bank is moving. You know, historically the core was really about the core banking processes and making sure that you look into your historical products, deposits and savings and loans, etc. and what you see now is that the core is about what is banking, and banking is evolving. And that’s exactly the purpose of Ingenio that we are part of is to define the future of banking. And that’s why adjusted services are becoming core. So, in order for a bank to go into, let’s say, the future, we need to extend the core and make sure that our core infrastructure allows us to roll out non existing core banking businesses, which actually could become the core of a new bank. And for that, we need new tools, new technology and who to be able to partner with makes sense. So, the core is evolving, it’s expanding, and we understand that. And for that partnership is a way to create the future core, if you will.
Gary: [00:13:11] Olivier, thank you very much for that. Søren, because you raise core Your comment briefly on core in the sense of what’s precious and what isn’t and how it might be changing and expanding.
Søren: [00:13:25] I’ll give you; I think the best way I could do so is by giving you an example from a recent dialogue with an incumbent bank. This bank is in the process of focusing its geographical footprint, but it has always been saying, and it will probably always be saying that it wants to follow its good and strong customers in their expansion. So how do you do that? How do you focus your geographical footprint on the regions that you’re really strong in while making sure that you support your core customers in their expansion? That’s a question, right? Because you want to hold on to your core. But of course, holding onto your core means you’re able to serve your core customers, sometimes outside of your geographical core. Now that’s a really good example because we at Banking Circle offer virtual IBAN accounts that an incumbent bank can issue to their customers and thereby allow their customers to have local accounts in local jurisdictions, local countries without that bank actually being present in that country and without that bank having to go through setting up its branch or going through heavy onboarding processes with other incumbent banks, but basically just issuing a virtual IBAN in that local country for the corporate customer. So, for me, that’s a good example of being able to focus on your core, which might be a geographical one, it might be a strategic one, but still being able through partnerships to serve your customers in and outside of your scope.
Gary: [00:15:00] Really interesting because I think what we are doing is dismantling the old traditional definition of core and recognizing that is changing. And those issues of the agility of methodology, the new emerging technologies, and the globalization changes that very fundamentally. Steven, let me come back to you, because we’ve talked about the infrastructure challenges, the COVID and indeed what’s core. What is it that is so powerful about working with the third party fintechs? And I suppose the challenge is how do you find the right ones? How do you engage with the fintech community in order to meet that strategic direction you’re both looking for? And it isn’t just about the technology. It’s about a number of things, I’m sure. So, Steven, your views on that and the challenge of working with partnerships and finding them?
Steven: [00:15:54] So I think from a partnership’s perspective, why is it attractive? And I think first and foremost it’s the recognition that banks are not tech shops. As I’m sure many of your listeners will empathize with. Banks historically have been exceptionally good at vendor management and selecting typically large tech companies to deliver multiple programs for them and have managed those processes. And as time has progressed and certainly the experience of Crown Agents Bank, we’ve looked at a very narrow focus of areas that we want to invest our time and our effort and money. And so being away from the big bank, very broad, universal approach, we’ve looked again to deliver accurately on a very narrowly defined area. So, the first thing that helps us to identify external fintech partners. So, the first thing was acknowledging that we’re not a Tech shop. So, do we build this ourselves? Do we be partners externally? We recognize that building ourselves is always going to be a challenge. That’s not the skill set our IT function has. Despite the fact that they have many skillsets, building that type of product capability wasn’t in the sweet spot. The second piece, again, first of all, is understanding. What you actually want to deliver. But of course, the devil is in the detail. What does that actually mean for you and your business? And for us, we recognize that because we have an appetite to not only bank fintechs but also to partner with fintechs, we were approached by hundreds of fintechs looking to work with us, all of whom thought they could add value to a business in a very large number of them could, I don’t doubt, it’s inherent upon Crown Agents Bank to be very accurate on what problem are we trying to solve. And for whom are we trying to solve it? And equally what outcome do we deliver so that we can recognize and justify the success? So, you can make that very simple. We said we want to build a global payment network. We want to serve financial institutions and development sector clients. And we want to create a certain revenue trajectory. So, if we answer those three questions, as we talked to engage the fintechs, that allowed us to narrow down the amount of investment and then to try and understand which ones might be the most suitable partners for us. And then there was probably the intangible element which is culture. And it’s working with Fintechs that we recognized share that culture with ourselves in that we’ve been dedicated to working with frontier markets. And it’s not just about making payments. We work with the central banks in frontier markets. We work with governments; we’ve been a key component part of facilitating trade both from a payment perspective and from a trade finance perspective across some of the most challenging markets on earth. And whilst there is obviously a revenue element to that, there’s also something deeply cultural within the bank. So, we want to be a positive impact on the markets that we serve today. So, finding fintechs that share that same mindset was really important to us because we recognize that there are challenges when you work between a regulated banking environment and a more agile or nimble fintech environment, and that can create tension. Whereas if you’re all working towards a similar objective, that is more of a culture, then it’s easier to overcome some of those inherent barriers around a regulated environment and the agile environment. So hopefully that gives a bit of context in terms of how we’ve certainly approached the solution of finding tech partners to grow and expand our business.
Gary: [00:20:12] Steven It does. Thank you very much. And in actual fact, I’d like to develop the theme a little bit by moving across, if I may speak to you, Olivier, because you clearly are a large bank. And the simple view of many is that large banks can’t pivot, they can’t change. And I know you’ve been on the journey for some years, but others haven’t. But large banks do have different challenges. So, picking up on some of Steven’s points, it isn’t just about using the third parties. It’s about a complete change within the organization. So, I just wonder how that’s been embedded in the DNA of ING, probably from the top down, perhaps. And then there’s a secondary question. Given your earlier comments about working in the fintech community and given your role, what are the failures that you’ve been through and learned from? Because there’s clearly paths, we go down that come to nothing.
Olivier: [00:21:103] Yeh, so, many stories around fintech and partnerships, some good, some less good, but obviously always a great learning experience. So back to your first question, it starts indeed with, as I mentioned, the culture and DNA and the willingness top down to actually be open for change and open for partnership, and then you will cascade it throughout the organization. One thing that we have done is to, in order to set up the DNA, is to develop our own methodology that we call base, which is a mixture of agile, lean and design thinking, which basically put the customer at the center of everything and just look for value. So not so much looking at solution, but really looking at the problem that we’re trying to solve, the opportunity that we are to capture and then moving into a solution. And when you do this, the design of the solution and keep on testing every assumption and hypothesis driven when you go into solution, this is where you look into, is that use case something for which we should partner looking at our own assets within ING, what we already have is we use first that’s really a starting point. So, we look into our assets if we don’t have that asset that we can reuse then is it strategic that we need to build completely because we need to own that? Obviously, that’s the obvious thing, right? You need to own your own you’re responsible. But how you build, let’s say, the value proposition all together with the ecosystem will be a case by case depending on the level of, let’s say, disruption, the level of commitment and strategic fit that you want to have. If it’s a community, obviously you want to partner, you want to buy. There is no question. If it becomes more strategic, you can still partner. But then there are different ways of addressing that conversation.
Today at ING we have more than 200 partnerships with fintechs. We are very active in that space. This year, we want to have more than ten partnerships. But my personal KPIs is not so much on how many partnerships because that’s what we started seven years ago. That’s why we have those hundreds of partnerships. Now it’s about impact. So how much additional P&L, users, clients we will get through those partnerships. And if those are not rich, then we should stop because that’s the point is the impact, right? So, I usually give the time for it. But like any partnership, at some point in time you should come to a conclusion. Is it working? Then you double up. If it’s not working, then it’s better to stop. So, my KPIs for this year is not so much the new one, but how much I will scale, how many existing partnerships we will scale throughout ING network, across countries, across business unit. And that’s for us at the moment, the focus is impact driven partnership on up but impact driven.
So to your questions, digitization innovation is crucial, but not exactly the same thing. So, the way we have operationalised it within ING is that innovation is not a prerequisite of just a few hundred people centrally. It’s everywhere, right? So, all the local units and all the business are actually innovating, but it all depends on the horizon. So, when it’s about incremental innovation, what we call digitization of existing processes and improvement, this is a reason why you could argue, and this is really the responsibility of all the business of ING. When it comes into, let’s say, disruptive innovations, digitally native, if you will, so really reinventing the business or creating new businesses, this is where Ingenio comes into place, and this is driven from a central team because we feel this is so important, but it has to be done to make sure that all the businesses of ING can connect to whatever innovation and whatever new business is, which is created through Ingenio. So, looking back at stories, you know, we have good stories. But in the end, which if you look back, the partnerships that do not work are either a cultural mismatch. This is so important the culture match that is most of the time the reason why stopping, but also the reason why it becomes successful. So, we need as a team and my fintech needs to ensure that there is this cultural match is very difficult to have the sentiment on this in a few days. So, when you do selection for that, we have multiple means and we have specific labs in Brussels and London where we do those proof of concepts where we take six months to see whether there is a match, technically speaking, cultural speaking, but also from a business perspective.
Another reason why a budget could fail, is whether it’s too local, or whether too early. So, I think in the early days, seven years ago we started we wanted to have numbers, right, to really experiment with what it is to partner. And then we’re looking for early start-ups and then we realize that it’s not a match because matching a size like ING with a 5 to 10 people company is just not possible. Why? Because then the bank comes with a risk policies and KYC policies and all those things. The onboarding of the fintech is too complex and we will crush the partner. And in order for a partner to succeed, you need to have an equal foot in the sense of what we bring to each other. And you don’t want to kill the other because you are different in size and approach. So, for us, a key success criteria is really to have a partner that went through one onboarding at least in a large financial institutions and large regulatory fashion institutions. That is for us a key success to start. And then the culture will do the rest and making sure that we have a regular check in on how the partnership is doing and whether it’s still the strategy fit is still there. And that is something that’s like any partnership should come from both sides and that’s what we learned along the way. So right now, it’s not about the number of partnerships, making sure that we have this crucial match, technical match and strategic fit that we cultivate along the way and that we can scale globally with our partners.
Gary: [00:26:46] I think it’s very interesting to pick up on that. But what I think the story that you’ve outlined there shows the maturity that the banks have got their heads around in terms of working with third parties and how the fintechs are very much in need of that collaboration with the banks. There’s mutual cooperation now, which was seen as a little bit divisive at one point and learning to fail and understanding that that’s not a black mark or a penalty within an organization is equally very important now. But the point there Søren if I can pick up on, aside from any general comment you want to make to Olivier’s point there, he said, I think it’s very interesting, the scalability. You can go to the pilot; you can get that tested. But at some point, there is quite a delta between going from something that works in a controlled environment to scale it to the size of a large organization, both in terms of the infrastructure, connectivity, the volume and the resilience and robustness. Steven, any final thoughts from your side of it on the number of organizations that institutions will work with on the fintech side?
Steven: [00:27:56] It’s very interesting. I think, as you’ve pointed out, most banks now are beginning to explore fintech, and I think it’s really important to recognize that the fintechs can and certainly do offer a disruptive force within the financial services sector. But actually, harnessed by a bank, they can be fantastic partners, absolutely fantastic partners who can really help to deliver a value adding service and solution to your underlying clients. And I think I would really encourage banks to embrace fintech and to embrace the optionality that it provides. Equally, I think banks themselves now take a very different approach to product development. You don’t have to go back too far in banking terms to recognize that product development was a very slow process historically in banks. And the banking payments product suite didn’t morph quickly at all. It has been fairly stagnant for a long time, and I really do believe that approach in attitude is changing and has changed for the majority of banks. So, I think it’s a really interesting and innovative time that we’re facing now. And I think the opportunity presented by not just fintechs but equally banks like ourselves, the opportunity that we provide to work with bigger banks or other fintechs to provide a more holistic system that we can offer to our clients is really vibrant now.
Gary: [00:29:48] The new normal, the new way of doing things against obviously the challenging world in which we live. The question we started off with really is, are financial infrastructure partnership, the future of banking? We decided to sort of take the subject, challenge it a little bit. I think we succeeded. It’s in our DNA, to quote Olivier, that working with third parties is the successful model. Making it successful is the challenge.
Russell Goldsmith: [00:30:16] Well, that’s it for this episode of the Knowledge Circle podcast. Thanks once again to our guests, Søren Skov Mogensen, Olivier Guillaumond and Steven Marshall and to Gary Wright for hosting. I hope you enjoyed the conversation and, if you did, please follow, like and share on your podcast platform of choice. Hope you can join us for the next episode. Until then, thanks for listening and goodbye.