A few years ago, if I asked you what comes to mind when you hear “Innovation Lab,” what would you think? Most would have responded with “a place where the best R&D brains come together to develop a new product.” But times have changed. Recent digital disruptions are demonstrating how innovation can spring up just about anywhere in a company and, perhaps curiously, collaboration is the new mantra for success.
Specifically, FinTech startups are leading this disruption by taking advantage of digital technologies and millennial demand to deliver innovative offerings. Their nimble approach is beginning to transform the banks’ historical product development method. But, can these startups collaborate with older institutions to bring innovation offerings to the masses?
Collaboration in practice
No surprise, playing in the same sandbox is always a challenge for first timers. JPM Chase has partnered with online lender OnDeck and UBS is collaborating with robo-advisor SigFig. Their motivation to partner with these matured FinTechs is to generate new business, but innovation is still a problem. Banks now realize that they need to nurture FinTechs through a co-innovation approach so that new ideas don’t outpace them.
As part of an internal educational effort, Cognizant analyzed over 170 bank FinTech initiatives that included partnerships, investments in accelerators, incubators and internal innovation centers, and acquisitions. This study showed that 40% of banks thought investments in innovation labs, incubators and accelerators would drive innovation in the long term. Also, due to its immediate business benefits, the partnership route was the most favored by almost 50% of banks.
The financial services industry is still experimenting with various methods to drive innovation internally and with FinTechs. The most common methods are:
- Innovation labs and programs
- Innovation focused venture funds
- Co-working spaces
Evolving co-innovation structures
Initially banks felt that it would be best to test future business models outside of their operating environment to ensure zero disruption in banking-as-usual. Now we see a changing of the guard. JPMC, for example, has opened its door for “side-by-side” co-innovation with FinTech startups. Through its six months “In-Residence” accelerator program, JPMC will provide its resources to promising startups and enable them to create solutions from inside the banking environment.
This approach will broaden the horizon for FinTechs beyond pure product development. As co-innovation matures, banks will no doubt want startups to understand the regulatory, business development, and service orientation environment as well.
The accelerator program
The UK’s central bank, the Bank of England, recently announced the launch of its FinTech accelerator program. It was a first for any central bank and unique in the sense that the scope was rather narrow. The bank’s goal is to find new ways of structuring and analyzing large data sets gained from regulatory reporting. This focused approach will allow the bank to test multiple FinTech ideas and select the best ideas to be applied into a real-life business scenario.
The shifting focus
FinTechs have garnered kudos for their ability to use technology for customer-centric solutions. Much of today’s credit has been given to them for their knack of understanding customer needs clearly. However, a lack-of-legacy burden has played an important role in simplifying the task. Increased focus on joint efforts will help redefine the core by using data analytics, blockchain, APIs, artificial intelligence and machine learning more rapidly.
I expect co-innovation to continue be a key aspect for the future of banking. The way that banks across the globe are converging to explore the potential of blockchain is a testament to this belief. As they carry on their voyage towards technological excellence, course corrections will be made, but the emphasis on collaboration will persist.
For more information on the benefits of a FinTech partnership, read my previous blog. Reply below with your thoughts on co-innovation in the banking sector.