How the build-or-buy debate in bank tech is evolving

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How banks approach fintech development is evolving.

Where it used to be a straight up build-or-buy-it proposition, many banks are starting more nimble, cost-effective incubators and making highly targeted investments designed to help improve their own offerings. A recent survey involving North American banks found that 54% of executives planned to invest in fintechs as a way to solve for consumer-facing technology shortcomings.

But there’s a near even split in how that’s accomplished: More than half (51%) of bank executives expressed a desire to create in-house accelerator/incubator programs while 44% will seek to acquire existing fintechs to achieve their objectives.

“Banks understand that in order for them to be able to respond to consumer demand and create customer journeys that are seamless, efficient and personalized, they need to be working with fintechs that are agile in bringing cool innovation to market,” Emily Steele, president of North America for Temenos,said ahead of the study’s official release on Tuesday.

Temenos sponsored the survey, conducted by The Economist’s Intelligence Unit, which was part of a larger global study that involved 400 executives. The North America results involved 70 bankers, 50 of whom are based in the U.S.

While the investmentand possible acquisition of fintechs potentially gives banks a chance to quickly address technology needs, such partnerships shouldn’t be the endgame in an institution’s innovation planning, observers said. Current and future internal investments are just as critical.

“Our strategy reflects many of these options” described in the study “but with a realization that innovation needs to be a core competency of our institution,” said John Piazza, the assistant vice president of digital innovation at MB Financial.

“This means we need to have the skillsets and the bandwidth to discover opportunities that benefit our clients and create solutions to address them ourselves, as we can’t rely on the outside world to do it all. It doesn’t make sense to rely on just acquiring or investing in outside companies or just focusing on an internal incubator.”

The survey’s results reflect that line of thinking. Half of the respondents said a “closed-bank hub initiative” that’s solely for the benefit of the bank is the best innovation strategy going forward.

However, 51% of bankers said open banking initiatives top their focus for 2019 and beyond.

“The two things that come up around open banking are fear of competition and data security,” said Steele. The trend regarding executive preferences for open banking “shows we may not be as fearful of it because we know that might be the direction we need to go to achieve the long-term goal of consumer journeys that make sense.”

Steele said that changing consumer behaviors and demands are driving the need for retail banks to refresh their services and products in the digital economy. Some 56% of respondents cited this trend as having the biggest impact on retail banks heading into 2020. That tied with regulatory fines and penalties paid back to consumers.

“We’re seeing that big push and big drive to reimagine banking so that it fits with today’s consumers,” said Steele. “And consumers have evolved with their loyalty. It used to be that consumers stayed with their banks for long periods. Today, we make banking decisions based on convenience and personalization versus anything else.”

Piazza said consumers’ fickleness will be vital for banks to overcome.

“The nature of customer engagement is always changing,” said Piazza. “Customers behaviors and expectations are changing, especially when you look at the consumer segment, and so the models we use to engage with them will have to adapt.

“Finding the right balance among purely digital touchpoints, face-to-face human interaction, and those areas that blur the lines between the two is challenging, but it’s a really fun challenge and one that is critically important. Building and maintaining strong customer relationships will always be a top priority for us.”

Banks will attempt to accomplish this with an uncertain regulatory environment as a backdrop. Executives in the study cited conforming to data protection and privacy regulation as the top challenge for banks concerned about data and third-party access via open banking.

While the U.S., and Canada, have yet to develop anything remotely approaching Europe’s Payment Services Directive or the General Data Protection Regulation, regulators are increasingly scrutinizing how banks, retailers and social media networks, among others, handle consumer data.

Steele said banks should lobby Congress to modernize privacy regulation along Europe’s approach.

“Europe has regulations that are actually driving and encouraging innovation, but in the U.S. regulations in some ways hold us back from innovating,” she said. “There’s a need for banks to really push the modernization of regulation, which I believe will drive innovation in many ways.”

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