Banks Should Scavenge Troubled Fintechs’ Talent and Technology

As a recession seems increasingly likely, 2023 advice for banking from Forrester analysts stresses the need to 'batten down the hatches' while preparing for an eventual upturn as well. Innovation must become practical and pragmatic, but future competitiveness can't be sacrificed for current profits.
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Banking has an unusual opportunity to glean the best from fintech companies slammed by a shortage of venture capital and lack of profitability. But financial institutions could blow this opportunity — and the dollars they’ll put into it — if they simply treat it as a fire sale and don’t use what they pick up intelligently and appropriately.

This warning comes from the banking team at Forrester as one of a series of technology-oriented predictions for 2023.

The research and consulting firm believes the massive drop in fintech valuations will drive many to seek partners or to put themselves on the block.

Fintech Crunch Changes the Balance:

Forrester projects that by the end of 2023 one out of ten fintechs will either be bought by a bank or sell an equity stake of at least 50% to a bank.

Beyond that, the consultancy believes that the growing layoffs among fintechs will cut loose talent that banks will snap up. In addition, worried fintech engineers, data scientists and others will look at employment offers from banks that suddenly look more stable than their own firms.

Larger institutions are more likely to be acquirers and investors, in Forrester’s view, while both larger and smaller banks will be recruiting and hiring fintech talent.

“The challenge with fintech talent acquisition is how long will they keep them for?” says Alyson Clarke, Principal Analyst.

How Fintech Friendly Is Your Bank?

“Often many fintech executives may have originally come from traditional banking and financial services. They moved away to fintech,” Clarke says, “because they didn’t feel like the banking culture was right for them. They wanted to do more innovative things, and to move faster.”

Banks that don’t “transplant” acquisitions of companies, tech and talent into good ground won’t hold onto the essentials. Once an upturn comes, former fintech staffers who aren’t happy in banking will look elsewhere or create their own startups, Clarke warns.

Acquirers of whole firms may still retain the software and other intellectual property that their fintech targets bring aboard.

“But at the end of the day, you’re going to need the people in order to keep it current,” says Clarke. She adds that without the talent, “it’s questionable whether banks have got the skills internally to help it survive and go forward.”

The “acqui-hire,” to use an increasingly common term, of talent by banks with deep pockets to buy fintech firms hasn’t always worked out for the talent. For example, BBVA’s U.S. arm bought the fintech Simple, hired marketing muscle, and later shut it down as the banking operation was on its way to being acquired by PNC.

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Where Should You Plug Fintech Into Your Bank?

A key consideration is where the acquisition or fintech people hired on their own wind up in the bank.

Early on in banks’ awakening to financial disruption, creation of fintech labs was in vogue.

“A lot of labs started because banks had to create a bubble of a different culture,” says Clarke. And the labs did produce fresh ideas, she says.

The problem, according to Clarke: “When they went to implement them at scale for banking customers, the culture of the organization and everything else that has to be in place for a rollout often dampened the idea’s success. The cultures were at odds with each other.”

Especially when banks bring aboard a senior fintech person, where they put them in the organization will be critically important to the ultimate success — and retention — of that hire, Clarke says.

Fintech's Round Peg Problem:

Putting fintech hires right into the bank's mainstream IT unit may not be right, but neither is isolating them in a fintech lab.

Finding some pocket in the organization where the culture is at least a bit different “may be nurturing enough,” says Clarke. However, ultimately it may be that the entire organization has to update its attitudes.

Some banking institutions have truly evolved, says Clarke. They have adopted agile development and design thinking, and have learned to work with a multitude of specialized vendors and have adopted “build and buy” thinking.

However, Clarke says many institutions really haven’t changed their attitudes at all.

“There’s still a lot of banks that are purely in the mode of ‘We’re going to build everything ourselves’,” says Clarke. “And then it takes forever to get anything done.”

But for a traditional institution that truly wants to change its thinking broadly, fintech hires can become “change agents,” says Clarke. “It could set off a spark for culture change in the organization, which is great.”

Read More: Which Neobanks Will Survive In the Future?

Process Improvement Is the New ‘Innovation’

Even as hiring fintech people or acquiring all or part of companies becomes more common in 2023, Forrester sees many institutions redirecting more than half of their innovation spending towards measures that will boost operational efficiency or cut costs.

In other words, developing a Metaverse presence will have low priority, according to the firm, but finding innovations in essential banking processes will rank highly

“Innovating and cutting costs doesn’t have to be an either-or these days,” says Clarke, “particularly when you’re looking at things like automation and efficiency.”

The accent should be on immediate needs for improvement, with an eye towards future needs, according to the consultant. However, financial institutions must avoid the temptation to turn every process improvement into an effort to cut human staff. They can’t think solely in terms of pushing customers further into self-serve and automated processes.

“It’s very tempting to be thinking that way in an economic downturn,” says Clarke. “But our data keeps telling us year after year that customers rate hybrid experiences in banking much higher. They prefer them.”

“Maintaining some human involvement helps you create stickier and more loyal customer relationships, which of course affects top-line growth over the longer term.”

— Alyson Clarke, Forrester

Process innovation — or “process mining” as Forrester calls it — should be undertaken with an eye towards the customer experience and what customers value, Clarke says. Balancing immediate savings against the value of creating relationships that will drive greater share of wallet as well as more recommendations to prospective customers is essential.

Read More: Details of Unusual Fintech Loan Partnership Between Alliant and Upstart

Don’t Let A Recession Stymie Technical Catch-Up

Clarke is adamant that the many banks that are still relying on antiquated legacy core processing must start, or continue, the transition to modern core system approaches.

Continuing to be bogged down in old technology constitutes what Forrester refers to as “technical debt” — the spending necessary to modernize.

“The longer they keep running their businesses on these outdated infrastructures, the more it is going to drag their business down and make them uncompetitive,” says Clarke.

Forrester predicts that 15% of banks will succumb to pressures to cut or contain technology costs in 2023 and for the duration of a downturn.

“Many were going to get rid of legacy systems, but they’re being derailed again,” says Clarke.

The cost of not taking action now may be too high. Clarke believes the temptation to apply yet more Band-Aids in order to cut tech budgets will backfire.

“When the economy begins to tick up again and the market moves, those who are investing in new and modern cores will grow at a much faster rate.”

— Alyson Clarke, Forrester

These institutions will be working with real-time information and will be able to configure new products more rapidly — indispensable competitive advantages — she adds. “Many institutions that keep coming up as top performers are those that have already moved to modern cores.”

Read More:

Understanding the Importance of Apple

A final point from Forrester is that the pandemic-driven uptick in consumer trust in traditional banking institutions is fading. The firm sees Apple’s unveiling of its high-yield savings deposit product in October 2022, and all the directions that can take, as a harbinger of competitive challenges to come.

“Many customers no longer think their banks understand them,” says Clarke. She says that is going to impact the ability of many institutions to create more revenue from existing customers bases. “There’s a very big link between revenue and trust,” says Clarke.

Apple has been cultivating an image of protecting data and customer privacy, Clarke explains. This goes towards building an image of trustworthiness that it wants to build on, with features in its Apple Card and related accounts that go beyond what many banks offer.

“They help customers understand what’s going on,” says Clarke. “There’s a real trusted brand status that Apple has and they’re leaning into it.”

“We expect the savings account to be successful given Apple’s status as a trusted brand and its large fan base,” Forrester’s banking predictions report states. “Banks must lead with empathy and take a data-driven approach to maintain and earn consumer trust with concrete, targeted actions that help them navigate the cost-of-living crisis.”

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