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Three Shifts to Drive Innovation in Financial Services

The insurgence of tech into the financial services ecosystem has created a more complex and more competitive environment for traditional FIs to navigate. Much has been written about the advantages of tech disruptors - Apple, Square, Facebook, Amazon, and others. They move more quickly, and with greater agility, bring innovative assets and tech to the marketplace, and leverage data more effectively to drive good outcomes for clients and consumers. In many ways, technology companies are driving innovation and progression in the financial ecosystem.

However, the advantages of traditional FIs remain powerful, deeply entrenched, and are, for the most part, can be complementary to those advantages of the tech industry. Traditional FIs and incumbent financial services companies retain strong consumer trust, and benefit from consumers’ resistance to put their money elsewhere (see for example, the growth of Zelle relative to that of Venmo).

The big challenge faced by traditional players in the financial space is not to out-compete, out-innovate, or out-perform newer entrants from the tech space. Instead, the winners in this space are sure to be those companies that are able to leverage the built-in advantages of incumbency- those advantages brought by consumer faith and regulatory strength- while complementing those advantages with the innovation advantages brought forth by tech.

To do this, traditional FIs must first overcome the partnership-as-a-last-resort mentality. When faced with a capability or innovation gap, the strategy and corporate development engines of traditional FIs and incumbents tend to favor building or acquiring capabilities, and tend to overlook the partner Partnerships with tech tend to be ad hoc and reactive, and are very often thrown together after internal build efforts have failed to meet expectations. The decision to partner should be made strategically, and with intention. According to our research, top performing companies (measured by revenue growth) report expecting 21% more of their future success to come from partnerships, vs. internal assets and capabilities alone, compared to the average.

In navigating this new, complex financial ecosystem, traditional FIs must understand, accept, and actively manage coopetition. There will inevitably be areas where FIs and partners are at competitive odds, and too often the thought of coopetition, or the potential that it will arise in the future, forecloses exploration of collaboration opportunities. That common “us versus them” mentality can be shortsighted, and detrimental to growth and success, especially in an environment where each side has much to offer the other. Both incumbents and disruptors must understand how to accept those areas of conflict, and actively manage them, to drive mutual value.

Third, FIs need to invest in teams for consistent partnership execution. The partnership management maturity of companies in the financial space remains quite low relative to companies in industries like biopharma, in which disciplined alliance and partner management has been common practice for many years.

Going forward, we’re excited to see what can be accomplished by those companies who embrace the above, and who can effectively align strategy and execution to realize the benefits of this new and more complex financial ecosystem.