For a long time, the terms "user friendly" and "banking experience" rarely appeared in the same sentence. Between limited banking hours and holidays, customer portals that would make Windows 3.1 look sophisticated and weeklong waits to transfer funds, almost nothing within the industry was designed around the customer. This approach didn't hurt banks, since complex regulation, capital requirements and entrenched technology kept potential disruptors at bay.
Now that's changing, thanks to a number of financial technology startups that are dismantling traditional business models and heightening customers' expectations. As the almighty Apple just proved with negotiations around the rollout of its eponymous payments platform, a siege on the financial industry has begun. While large financial institutions aren't driving the bulk of this change, collaboration between startups and established players has the potential to pay off in a big way for both parties.
In order for this opportunity to manifest-for financial institutions and service providers to really stay relevant-there are three key challenges that must be overcome.
First among these are the perceived systemic difficulties, such as the interoperability between new technologies and embedded architectures, as well as regulatory compliance.
Second are the inherent fiduciary responsibilities that larger institutions have to their shareholders and their partners-many of whom may prefer predictable growth or short-term "wins."
Lastly, cultural differences could prove tricky, particularly when it comes to close collaboration between conservative, deliberate financial institutions and fast-moving and risk-tolerant technology companies.
However, there are ways to overcome these hurdles. Take, for instance, the OpenBankProject, a UK-based initiative that uses open-source technology to provide banks and businesses access to an ecosystem of third-party apps and application program interfaces. This negates the need for banks to develop proprietary technology for every use case.
At first glance, open-source APIs might not seem well suited to the highly secure and regulated banking sector. But the approach uses the financial institution's existing compliance and security operations to satisfy regulatory obligations. Banks as large as the Royal Bank of Scotland and BNP Paribas are already testing the Open Bank Project API, and initial reports have been glowing. In a recent hackathon, BNP Paribas used the API to work with more than 50 fintech startups over a weekend.
The fintech space is also tightly regulated, if not to the extent of the banking industry. This is why many emerging companies actively seek out guidance from regulators early in their growth. It's through this thoughtful approach to regulation that startups are able not only to satisfy their respective reporting requirements-such as know-your-customer and anti-money-laundering rules-but to actually bring a wealth of innovation to the industry.
One example of such innovation comes from the online small-business lending platform Kabbage, which recently inked a partnership with MasterCard. Kabbage uses a number of traditional verification vendors to ensure compliance for its loans and partners. It also uses a host of nontraditional data points to help verify identities, as well as calculate and mitigate risk.
While consistent growth is critical, fiduciary obligations may inhibit a bank's ability to innovate—creating stagnation and encouraging the nearsightedness that invites disruption and jeopardizes a company's long-term relevance. But even this isn't insurmountable.
A perfect demonstration of this is the Spanish bank BBVA and its American subsidiary, BBVA Compass. (Full disclosure: My company, Dwolla, partners with BBVA Compass.) The companies have been molding themselves into truly digital-first brands through smart partnerships, acquisitions and—importantly—a diverse investment strategy.
Recognizing early on that speed, user experience and context would be key elements to creating user-friendly and monetizable customer interactions (and therefore long-term shareholder value), BBVA made a conscious decision to spend smartly in multiple areas that showed promise and upside. By seeking out truly disruptive technologies from nontraditional partners like big-data startup Madiva, the BBVA Group has been able to maximize digital investment and rally its digitally active customers to 9.1 million in 2014, excluding Garanti Bank—a 22% increase over 2013, according to the company.
This leaves us with the third challenge: culture. This may prove to be the hardest issue for banks and fintech companies to reconcile, since both sides may have to deal with discomfort and question some long-held beliefs.
BNP Paribas has recently taken an interesting approach by offering its office space and mentorship to promising young companies in San Francisco. This proximity forces drastically different organizations to learn from one another. The exposure to new ideas, processes, and culture provides the cohabitants with surprising market insights, maturity, and opportunities for greater collaboration.
The new age of fintech collaboration is here, and victory will go to those who understand that innovation isn't likely to come from unlikely sources—it invariably will. Collaboration enables financial institutions to spread risk, address regulatory burdens and drive down research and development costs and overall time to market. On top of this, by hand-selecting partners and placing many small bets on technology, banks access fresh minds and bring a potential competitor into the fold.
When banks think strategically, invest intelligently and collaborate with fintech to provide the speed, cost and value their customers expect, they can expect to stay relevant in the years ahead.
Jordan Lampe is director of communications and policy at Dwolla, a real-time
interoperability and communication platform for financial institutions. He represents
nonbank service providers on the Federal Reserve's Faster Payment steering committee.