Strategy

What They Don’t Teach You at Banking School

May 31, 2017 by JP Nicols

The financial services industry has a long and important tradition of executive education. Up and coming managers are sent off to graduate banking programs to learn industry best practices developed over prior decades, and in some cases, centuries. These programs are well prepared to teach the evolving art and science of asset and liability management, credit underwriting, portfolio management, and general leadership and management principles.

However, many programs have not always been so well suited to prepare their students for the revolutionary changes that have been impacting financial services in profound and dramatic ways. I created the world’s first graduate banking school class on fintech and innovation to help address this gap. I first taught the class in 2015 at the Pacific Coast Banking School, held at the University of Washington, where it has become one of the program’s most poplar classes. I have also taught portions of it at many industry seminars and workshops before and since. This year I am looking forward to also joining the esteemed faculties of the Graduate School of Banking at Colorado and the Graduate School of Banking at Wisconsin to help prepare our future leaders.

These are some of the key lessons for students who not only want to master the best practices of the past, but to also learn how to establish the next practices to shape the future of banking.

1) Think Beyond Traditional Competitors

The nature of competition in financial services has changed more in the past 10 years than in the prior 100. It is no longer sufficient to measure your performance relative to your peer group of similar sized and similarly structured financial institutions. Regional and national competitors once relegated as secondary competitors by local knowledge and community ties have bridged those gaps with the rise of broadband, mobility, and apps. The dynamics of competition have been further stretched to include fintech competitors from across the country and around the world, providing new alternatives to every traditional product and service. Leaders must have a much broader view of competition and competitiveness to achieve success in this changing environment.

2) ‘Plan Your Work and Work Your Plan’ Doesn’t Work Anymore

The logical and pragmatic credo of ‘plan your work and work your plan’ resonates with the analytical and risk-averse nature of bankers, and in more predictable times with more homogeneous competitors it generally worked. Today’s leaders can no longer afford to spend several quarters perfecting and vetting plans internally before learning how they actually perform in the market. The answers lie outside the building, and leaders must learn how to adopt and lead a more agile ‘test and learn’ approach to replace opinions with facts more quickly. Just as important, they also have to learn the skills to be able to adjust their course accordingly as the data requires.

3) The Effective Allocation of Limited Resources

Financial capital, human capital, and managerial time and attention are the primary resources leaders have at their disposal to create positive outcomes. Like all resources, these too are limited, and they most be used wisely, and not just for short-term results. Despite their precious rarity and the uncertainty of investing in the unknown, some portion of these limited resources must be allocated toward creating strategic options for the future. As tempting as it is to wait and see, to hold out for some undefined future date where the horizon must surely come into clearer focus, the reality is that the risk only increases the longer you wait to take action. The best way to predict the future is to create it.

4) Collaborating with Internal and External Partners

The financial institutions that are winning today and that are most likely to win in the future look a lot more like technology companies than ever before. Data scientists, programmers, designers, and engineers are among the fasted growing job titles, and leaders need to be know how to manage their skills and their work toward the outcomes that tomorrow’s customers demand. Increasingly, this means leading effective collaboration across internal business units, and even more challenging, with external vendors and partners. This isn’t about the mindless pursuit of cool technology and shiny objects, it’s about leveraging modern tools to find new ways to create value.

5) Leading Change

An organization’s natural state is to maintain the status quo, and human nature prefers routine and familiarity over change and uncertainty. Today’s leaders need adaptive and situational leadership skills to map a course through uncharted territory, and keep the team focused on the goal, even when it might not be so clear from the onset. To focus more on deeply understanding the needs of the customers and orienting the products and services around them rather than just selling what you have.

Like leaders, innovators are made, not born. Tools and frameworks can be taught and practiced, and everyone should have a role in improving existing products and processes beyond simply executing business as usual. This is even more important for leaders, and most organizations cannot afford a full team dedicated to nothing but innovating new solutions.

New technologies such as distributed ledger technologies, artificial intelligence, and machine learning are still in the early stages. We don’t know exactly how it will all play out just yet, but we must help our leaders embrace and lead change to explore the possibilities and manage the risks.

None of these lessons will sound new to anyone who has read or heard me before, but they are still pretty unique for the traditional banking school curriculum. Hopefully they will become less rare as leaders bring these skills back to their job and use them to help develop future leaders inside their organizations.

Our future depends on it.

The Power of One Sigma

January 31, 2017 by JP Nicols

Six Sigma is a quality improvement program that gets its name from the concept of 99.9997% quality. In statistics, each sigma represents the statistical measure of 1 standard deviation from the mean in a range of outcomes in a normal distribution. Six sigma translates into no more than 3.4 defects per million opportunities.

It is often related to (and sometimes conflated with) the concept of “Lean”, which was coined to describe Toyota’s manufacturing practices during the late 1980s, when their level of consistent quality was noticeably superior to much of what was coming out of Detroit at the time. Lean focuses on improving efficiencies by reducing waste through standardization and elimination of non-value-added efforts. Six Sigma, developed by Motorola and widely popularized by GE and others, focuses on improving quality by reducing process variation and using detailed measurement and statistical analysis. The two are often used in tandem in Lean Six Sigma programs.

Striving for this kind of consistent quality can save lives in healthcare procedures and plant safety. It is what we have come to expect today from our personal electronic devices and even from lower priced automobiles, and this is the kind of uptime we expect from computer and communications networks.

In financial services, it’s what we strive for in our transaction processing, statement production, compliance programs, and reliability of our ATMs and core systems.

What’s not to like?

Quality, consistency, efficiency, defect reduction, what’s not to like?

Lean and Six Sigma programs work well when there are identical operations and repeatable processes in large volumes, particularly when those operations can generate a lot of accurately measured data. When administered properly, they also focus on creating real value by improving quality, cost and customer satisfaction.

But what happens when you perfectly execute the wrong priorities?

Kodak was arguably the best manufacturer of celluloid film in the world (although Fuji Film might argue that one). Nokia was the world’s leading maker of mobile phones, with 48.7% market share in 2007. Sony’s Walkman was the leader in portable music for a decade. The quality of their operations was admirable, and not what turned out to be the achilles heel for those companies.

New technologies and new business models regularly disrupt the status quo. Blockbuster beat all comers in the business of operating video rental stores. They executed the standard business model of their industry better than anyone else. Netflix didn’t beat them at their own game, they changed the game.

Blockbuster is an especially good example for financial services. For most of the industry’s history, success has been about executing the same business model better than largely similar competitors. The winners of the consolidation wars over the past three decades have been those who executed with the efficiency that created operating leverage.

“There is nothing so useless as doing efficiently that which should not be done at all” – Peter Drucker

Efficiency and positive operating leverage are important ways to win the standard game in financial services, but they aren’t necessarily enough to counteract the new technologies and new business models that are changing the game now and in coming years. Nor will simply blindly going all-in on the latest in fintech hype. How can we balance operational excellence and efficiency with flexibility and innovation?

The power of One Sigma

One of the drivers of the dot com boom and bust of late 1990s was the notion of ‘build it and they will come’. Billions of dollars of equity was invested in new technologies that were promising, yet unproven in the marketplace. Valuations got unreasonably optimistic, money flowed too freely, and millions of dollars of advertising was spent hawking products that not enough people wanted.

Eventually reality set in, valuations came back to earth, and the weakest value propositions died off. New wisdom prevailed from Geoffrey Moore, Steve Blank, and others, including Eric Ries who offered a better formula for testing ideas before making big bets. This process of Build, Measure, and Learn is a twist on “lean” methodologies that Ries detailed in his bestselling book The Lean Startup. But this ‘nail it then scale it’ approach is not just for startups.

In financial services we tend to think that if we can just get all of our smartest people in a conference room, perhaps supplemented with the best consulting minds we can rent from the outside, we can perfectly plan out all of our strategies and “roadmaps” down to the last detail. Then, all we need to do is execute them perfectly. Plan your work and work your plan. Simple, right?

But the marketplace has a way of making us look stupid when we make think we can plan for every contingency up front. Market conditions change, customer preferences evolve, and the competitive landscape shifts, so our plans have to be flexible and responsive to these changing conditions.

One Sigma in a normal distribution covers more than two-thirds (68.27% to be exact) of the outcomes. That’s not nearly good enough for heart surgery or network reliability, but it’s a pretty good indication that you’re on to something worth testing further.

The answers are outside the building, not inside the boardroom. The sooner we can test our ideas, the sooner we’ll know whether we should increase our bets or iterate to something better. That’s stacking the odds in your favor in the strategic planning process.

By all means keep those Lean and Six Sigma programs going where they’re working, but navigating these uncharted waters in our rapidly changing industry takes a new approach. It’s time to embrace the power of One Sigma.

Integrated Loyalty: How Uber and Capital One Embedded Loyalty into the Customer Experience

November 22, 2016 by JP Nicols

This is the last of my special Invested in Tech series with Capital One, where I have been taking a look behind the scenes at how they are using technology, innovation, and design to create a better banking experience. In my last post I spoke to Naveed Anwar who runs Capital One’s developer community partnerships and integrations, and he talked about their unique partnership with Uber.

It’s become well-worn trope in fintech punditry to declare such and such an app or company as the “Uber of banking”, presumably meaning both that it’s a seamless customer and payment experience, and also something with massive growth potential. When I speak at banking conferences I often ask for a show of hands for how many people use Uber as a way of demonstrating the rapid growth of disruptive technology. A majority of hands always go up, and it is easily in the 80-90% range in any major urban area.

I tell the audience that they would have called me crazy if I would have told them five years ago that instead of standing at the curb with their hand in the air they would soon tap a button on their smartphone to geolocate a nearby car, and then simply exit the car at the end of the ride. I also tell them that they may think I’m crazy now for telling them that soon that car won’t have a driver behind the wheel, but Uber is already working on that right now.

This on-demand seamless delivery is raising the bar for customer expectations in banking, and so is the Uber payment experience. To me the best part of the Uber payment experience is that there isn’t one. I don’t want a payment experience, I want a ride from point A to point B. It’s a great example of the “disappearance of payments” that payments expert Ginger Schmeltzer talked about at the Fintech Stage at the BAI Beacon conference in Chicago last month.

How can a bank improve on that?

Lauren Liss, Senior Director of Digital Partnerships, Card at Capital One gave me a deeper look at how the bank is working with Uber to simplify life for their customers. In June 2016, they announced their partnership to create Uber’s first ever in-app loyalty experience: every 10^th Uber ride was free when customers paid with a Quicksilver or QuicksilverOne card, through March, 2017. Then, earlier this month two companies announced they were evolving the offer to make it even more valuable for customers. As of November 1, customers get $15 in Uber credits – instead of a free ride (valued at up to $15) – every time they pay for 9 rides with a Quicksilver card through March 31, 2017. Unlike the previously earned free ride tokens, the $15 Uber credits can be used on multiple rides at any time through April 30, 2017.

The two companies have worked together since April 2015, and Liss says the relationship makes sense because of their shared focus on providing savings and convenience.

“To me, the best part about our partnership with Uber is that we’re able to create experiences for our customers that are simple and help them save.” says Liss, “This year we’ve created – and improved on – a valuable offer that comes with a clean user experience, created based on customer feedback.

Liss said her team is focused on creating solutions that simplify life for their customers, so embedding a loyalty experience into the Uber app – and then improving on it – helps deliver on those goals.

For more on how technology, innovation, and design are being leveraged to create a better banking experience, read my related interviews and listen to my podcasts with Capital One’s Global Head of Design Scott Zimmer, their head of digital Tom Poole, and their head of platform and developer community Naveed Anwar.

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Thanks to Capital One for sponsoring these posts and podcasts and for providing access to their team, but all of the opinions expressed are still mine, all mine. For more information about Capital One, visit www.CapitalOne.com

Banking on Blockchain

November 9, 2016 by JP Nicols

Last week I attended an IBM blockchain discussion at Rise New York, featuring Jalak Jobanputra, Founder and Managing Partner of Future\Perfect Ventures and Brigid McDermott, Vice President of Blockchain Business Development & Ecosystem for IBM, and moderated by Todd Pruzan, Editorial Director for Ogilvy.

You can catch the video of the event here, and also see my live tweet stream from the event here.

Blockchain technology has been at the most dizzying heights of the hype curve of fintech pundits for the past year or two, and while it may not quite fulfill all of the fantastic dreams that its most fervent zealots claim, it truly is transformational technology, and it’s time for even the most technophobic bankers to pay attention.

This is not a technical monograph on blockchain. If you want to dig deeper, I encourage you to read more from my brilliant friends Chris Skinner, Dave Birch, or Simon Taylor, or at least listen to our blockchain series on the Breaking Banks podcast, featuring all three of them, plus many other experts.

The concept of a blockchain—literally chaining blocks of data to one another— results in a distributed database or ledger system where all participants have transparent access to one true version of the data. This decentralized consensus creates trust without the need for a central administrator. Contrast this to multiple parties maintaining their own separate ledgers with everyone logging their own view of additions, subtractions and transfers.

The first blockchain was used as the basis for the bitcoin network starting in 2009, serving as a public ledger for all transactions. Over the last couple of years many new use cases have been envisioned outside of cryptocurrencies, and the panelists mentioned some on stage that reach beyond financial services.

Blockchain Beyond Banking

Jobanputra says the current state of blockchain is somewhat analogous to the early days of the internet, and she sees opportunities for leapfrogging current technologies, especially in emerging markets. Mobile phones grew quickly in many emerging markets, leapfrogging the need for expensive infrastructure of landlines, and enabling financial innovation such as M-pesa for mobile payments in Kenya. Her firm Future\Perfect Ventures has investments in several blockchain companies, including BitPesa, which is blockchain-powered payment network in Africa.

IBM’s McDermott also sees blockchain as a way to reduce infrastructure and transaction costs and eliminate middlemen that create barriers to entry for individuals and smaller firms in both emerging and developed markets. In particular, she sees a huge opportunity in supply chain management— “getting the right goods to the right place at the right time”, which she says, touches everything in our lives.

Beyond providing greater transparency and visibility on shipments that can help reduce $600 billion of fraud global trade every year, blockchain can also reduce the high cost of sending confirming documents. Even more exciting to the panelists is the ability to link the blockchain to other technology, such as self-enforcing “smart contracts”, and cognitive computing to provide powerful analytics for things like demand forecasting. McDermott thinks this is where IBM’s enterprise approach to blockchain gives them a competitive advantage.

Banking on Blockchain

Yet, as blockchain spreads outside of financial services, it also brings it right back. Trade clearing and settlement are the areas most often cited as a prime opportunity for blockchain use in financial services, but payments, trade finance, currency settlement and lending applications are picking up steam too.

This democratization of the ecosystem is another threat to the traditional gatekeeper model of financial institutions, but it also offers a transformational opportunity for those that can think beyond reducing costs and improving transactional efficiency.

“Just ‘blockchainizing’ current processes very much limits the potential of what blockchain can do.” Says McDermott, “Where blockchain is going to be really valuable is where it helps transform the process, not just changing the technology of an existing process”.

McDermott also says she has to now think in “blockchain years”, where things expected to take a couple of years are now taking a couple of months. We are seeing this with financial institutions adopting blockchain technology dramatically faster than initially expected. IBM recently reported that 15% of top global banks intend to roll out “full-scale, commercial blockchain products in 2017”, and that 65% of banks are expected to have some sort of blockchain project in the works within the next three years.

William Gibson is more right today than ever: “The future is already here, it’s just not widely distributed yet”.

Thanks to IBM for sponsoring this post and my live-tweeting of their event, but all opinions expressed are still mine, all mine. For more information on IBM’s work on blockchain, visit IBM.com/blockchain.

Building Better Bank-Fintech Partnerships

November 7, 2016 by JP Nicols

Talk of banks and fintech companies partnering together has increased dramatically in the past year. There have definitely been some interesting partnerships announced, particularly with some of the marketplace lenders, various blockchain projects and some artificial intelligence driven bots. Most are in stages that are too early for a full analysis at this point.

There has also been a lot of hype and a lot of misunderstanding from both sides. Too many fintechs have a feature or technical capability but don’t really understand what problem they’re solving for whom or what it will take to make it work within banks’ highly regulated environment. And too many banks think that they are “already partnering with fintechs” because they have a few technology vendors and a procurement department. In short, most of them might as well be on different planets.

I sat down with Naveed Anwar who runs Capital One’s developer community and partnerships and integrations, as a part of the Invested in Tech blog and podcast series with Capital One to look at how things are going at DevExchange, the developer community that the bank announced last spring at SXSW.

Anwar sees DevExchange as an opportunity for both internal and external innovators to co-create new experiences, and he sees it as a groundbreaking opportunity in what Ron Shevlin calls the “platformification” of banking. Anwar thinks that a “platform mindset” is necessary for staying relevant, and that the bank alone cannot create all of the experiences that their customers want and need.

“There’s a platform transformation taking place in the industry”, says Anwar, “and we’re in the midst of it.”

Opening up APIs to outside software developers facilitates much of that co-creation and collaboration. APIs (application programming interfaces) are pretty basic technology for developers, even if they represent new vernacular for the average banker. APIs offer a set of well-defined standards that allow different kinds of software to talk to one another and build on each other. Think about how Google Maps often show up inside of other apps as an example. Google shares its Maps API with outside developers because it creates a win-win for both sides. Other apps gain the detailed functionality of Google maps without having to build it all from scratch, and Google gets more users and data.

Currently there are three APIs shared on the DevExchange platform:

Credit Offers, which returns a personalized list of Capital One credit card offers.
Swift ID, which is a two-factor authentication that gives customers a secure way to approve access requests for confidential information.
Rewards, which offers information on miles, points or cash rewards earned.

DevExchange is still in Beta, so Anwar and his team are planning to release additional APIs in the future. He says they are learning a lot from both customers and developers in the Beta, and one of the things that came out of it was a co-creation with the ride-sharing app Uber that gives certain Capital One credit card holders a $15 credit after every time they have paid for 9 rides with the card, through March 2017.

Co-creation is about a two-way conversation, says Anwar, “It’s not about us pushing our stuff on to them, without listening to them. If you don’t listen to your community, you will be irrelevant”. It’s also about making the tools easy to use, and Anwar says that developers can be set up on the platform in less than two minutes.

Anwar’s goal is to make the process frictionless for developers, but it takes a lot of work to make things look easy: “Building and sustaining a platform mindset requires a lot of patience. It’s not a transformation that takes place overnight.”

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Improving the Consumer Payment Experience

November 1, 2016 by JP Nicols

I’m continuing my look behind the scenes at Capital One to see how they are using technology, innovation, and design to create a better banking experience. Last week at Money20/20, I spent some time with Tom Poole, Managing Vice President for Digital at Capital One.

I heard Tom speak on a panel called “The Role of Mobile Wallets in Streamlining Online and Mobile App Payments” at the conference, and I asked him afterward about his comments in the panel. I also recorded the interview for a Breaking Banks podcast.

Poole sees three types of mobile wallets. First, are the kinds from tech giants that are focused on paying at the point of sale and leverage the capabilities of their device, such as Apple Pay and Android Pay. Second are those from merchants that focus on their loyalty programs, such as Starbucks.

Finally, there are mobile wallets from banks, and Poole thinks banks have unique advantages in information and control. The bank authorizes the transaction, so they are the first to know when a transaction was approved, what it was for, who it was with, etc. That information can be leveraged to notify the customer on duplicate charges, or if a recurring charge jumped 50% from the month before, or that a trial period expired and they are now paying a recurring monthly fee, and so on.

There is a lot of buzz in the industry about making payments “frictionless”, but that’s not always a good thing. “Everybody wants to carve out steps that feel unnecessary or not value adding to the payment,” he says, but “there are times when friction is a good thing. Sometimes I need to be told that I’m about to pay for something that would completely be off of my radar screen.”

In fact, customers like certain kinds of “friction”, like notifications that give them knowledge and insights about where their money is going. “It appalls anybody paying five dollars for a subscription to a website they’re no longer using and don’t have need for.”

Poole says that the great thing about the customer experience in payments is that none of it is about the payment, it’s all about the information and experience that surrounds that payment. So his team is focused on making sure customers get the right information at the right time to make better decisions, and they work to bring in resources to help them save money and save time.

Tom Poole, Managing Vice President for Digital at Capital One

Many of the themes around experience design and a Test and Learn culture that come up in my interview with Scott Zimmer, Capital One’s Global Head of Design, also came up with Tom Poole. He described their user labs inside their buildings, and how his team uses them to find out how customers actually interact their products, sometimes finding that some of their “great ideas” turn out not to resonate with customers.

They use low fidelity prototypes and mockups to get more honest reactions from users. Customers often don’t want to insult the feelings of the team if they are presented with something very done and polished that obviously took a lot of work. Even with that amount of preparation, it still might be the wrong experience, so they pay a lot of attention to how real customers are reacting to finished products too.

Poole described an example where customers thought a “Tap to Pay” button on their mobile wallet app was broken because it took them over to Apple Pay. It turned out that they were looking for full bill pay functionality behind that button. So the team relabeled the button to read “Apple Pay”, and now the button did exactly what customers were expecting.

This insight also caused the team to add a link to bill pay, which was in the Capital One main banking app, a feature that they originally had no idea that customers would want in the mobile wallet app. “Two sources of customer frustration gone,” Poole continued, “but it took a lot of fine tuning to realize exactly that consumer expectations about what the app would do, and what we as designers thought it should do, were totally different.”

Even with all of that effort, customer experience and service design are still more art than science. As Tom Poole put it, “There are a thousand ways to mess up a feature, and really only one or two to get it exactly right”.

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Designing a Better Banking Experience

October 27, 2016 by JP Nicols

designing-a-better-banking-experience

This week at Money20/20 in Las Vegas I spent some time behind the scenes at Capital One to see how they are using technology, innovation, and design to create a better banking experience.

I sat down with Scott Zimmer, Capital One’s Global Head of Design, to focus on how design is taking on a growing role in banking. He describes himself as a “Disney-bred creative, someone who’s driven to create”. Not exactly a common bio quote for most bankers, but one that may grow more familiar as design takes an increasingly important role in the industry.

“There’s a pretty compelling story in banking, and the things we do for people matter to people on a human level,” says Zimmer, “and in the design community, that’s what designers were born to do.”

Listen to the interview here:

Design is about a lot more than making things look pretty. It’s about making things work better. Technology has been a democratizing force across so many industries, and banking is no exception. Customers have more choices than ever, and those choices now include products, services and experiences that are often far superior than the you’ll-take-what-we-make era that prevailed for so long.

I have heard a lot of bankers proclaim their desire to make their branches more like Apple stores, but for too many of them that desire begins and ends with the clean visual aesthetic. The effectiveness of the design of the Apple store that makes it so successful goes far deeper than that. Zimmer agrees, “Steve (Jobs) was famous for saying ‘design is really how something works’, and what’s interesting about the Apple store in all its starkness, is they simplified it, to make it work better.”

The business case for beautiful products and compelling customer experiences is a tough one for most boards and executives to get their hands around. I know this firsthand from my work helping some of them with their strategic planning, as they fret about making big bets that might not payoff. A good design process involves a ‘test and learn’ approach that is well known to any fintech entrepreneurs following lean startup principles. It’s an approach that banks should be using in more of their business decisions.

As Zimmer puts it: “We try to avoid failing at scale”

Scott Zimmer – Global Head of Design, Capital One

Las Vegas is an appropriate setting for using a poker analogy to describe the advantages of this approach (blackjack works too). Rather than pushing all of their chips to the center of the table and declaring “all in” as the first cards are dealt, the savvy player makes small bets and only increases them until the cards are in their favor.

“It’s the thing that has transitioned product development dramatically”, says Zimmer, “in days past you might have made two, three big bets a year, and now, any team that’s working in this collaborative, iterative fashion can be making sixty, seventy bets at one time, but with minimal investment.”

Zimmer and his team have brought this iterative test and learn approach inside the organization too. They’ve built user labs to test ideas with customers much earlier, and this gives them better insights into what’s working and what’s not much sooner. He contrasts that approach with the typical big meeting going over a PowerPoint presentation that someone has worked on internally for weeks. That approach can cause teams to be defensive about their hard work instead of working through the options more collaboratively with more early contact with customers.

The future of design is evolving beyond spaces, products and services. Zimmer also talked about the challenge of designing for voice with the Capital One skill for Amazon Echo, with a team focused on conversation design “obsessing around the humanity that has to come through in an interaction and what the word choices are”. That work is continuing with the release of an update to the skill called “How Much Did I Spend?” that was built with a natural language query, “as though you are talking with your money”.

Zimmer sees parallels between financial health and physical health, and he thinks software and good design can help us to set goals and achieve them. “The ability to leverage software’s capability to do that is this new era that’s upon us of creating new products and services. I think design plays a huge role, and there’s a bright future ahead.”

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Bankers Are From Mars…

September 6, 2016 by JP Nicols

It is not news here, or anywhere else, but bankers and fintech entrepreneurs are from different planets.

They are just wired differently.

Just a few years ago, all of the fintech companies wanted to put traditional financial institutions out of business. Disrupt the industry!, they said.

Despite the fact that we still have over 6,000 banks in the U.S. alone, plus a similar number of credit unions, the industry has been disrupted. But acquiring new customers at scale is hard for fintechs, and now the talk is about the value of fintechs partnering with financial institutions, instead of trying to put them out of business.

That’s not necessarily any easier, it’s just a different kind of hard.

Many have focused on technology integration, getting new apps and systems to work with banks’ aging technology infrastructure. The technology-driven nature of many new innovations makes this necessary, but it is not sufficient.

Successful partnerships between fintech companies and financial institutions need go beyond technology integration to address these three elements:

The Three C’s of Bank/Fintech Partnerships

Cost

Building out an internal innovation team is not cheap. That’s why so few FIs have them, and why an increasing number are adding what I call “And-I’s“– employees with “and Innovation” tacked on as an additional responsibility to their existing job titles.

Banks and credit unions are recognizing the increasingly urgent need to update their products and processes to stay relevant with their customers and members, but searching for, evaluating, and vetting potential partners takes a lot of time and money too.

Often overlooked though is the cost of an inefficient innovation process carried out part-time by inexperienced people. Common traps include devoting too much time to planning and defining user requirements, and not enough time actually testing new ideas; and pursuing a random collection of “interesting” projects that do not tie into the organization’s strategic priorities.

Culture

Most senior executives at financial institutions have spent at least part of their career in a lending role, where they needed to make the right decision just about 99% of the time over the long run.

Entrepreneurs experiment with new ideas with an aim to fail fast and fail cheaply, because each iteration and pivot gets them closer to the right answer in the market. The venture capitalists investing in these companies know that close to half (or more) of them will fail.

Most banks and credit unions are not going to be leaders in product innovation, so partnering with more nimble fintech companies makes sense.

But partnering takes more than simple introductions between two different parties with vastly different approaches.

Successful partnership requires FIs to address their own culture to create space inside their own organizations that embraces change. Fintech companies need to understand the conservative nature of their potential FI customers and adjust their sales and development processes accordingly.

Compliance

Fintech companies also need to understand that the ‘move fast and break things‘ ethos of Silicon Valley does not work inside a highly regulated environment.

Every new solution, no matter how cool the technology, has to be compliant if it is going to be used by a traditional financial institution. There is simply no other option.

At the same time, FIs need to recognize that regulation is always going to lag innovation, and they must take a more proactive approach in trying new ideas. The most innovative banks, credit unions, and fintech companies all have proactive relationships with regulators to try new ideas that will still be compliant.

Choosing to sit on the sidelines out of fear is not an effective risk management strategy.

Improving Interplanetary Relations

Yes, bankers and fintech entrpreneurs are from different planets, and I’ll leave it up to you to decide which ones have more inhabitants on Uranus.

It’s time to improve interplanetary relations. Bankers learn about the 5 C’s of credit in their first days of training, maybe it’s time they learned the 3 C’s of Fintech Partnerships.