Insights

Banks Should Take A Page From Fintechs On Innovation

By Barrie Wilkinson and Rick Chavez
This article first appeared on American Banker on January 22, 2019.

Financial services firms have spent the past decade shoring up their balance sheets and conforming to regulatory overhauls all over the world. Now, like a coiled spring, they are ready to break out of their slow-growth cycle, inspired by the hypergrowth in customers and market values of leading technology firms.

But not everyone will be able to shift into higher gear. To do so requires a radical new mindset known as “greenfield.” The process of starting anew — unencumbered by legacy technology systems and outdated mindsets and business models — is called greenfield because it is like the fresh, unspoiled land on which a construction project is launched. It is radical because it requires financial services firms to make a clean break with the past and begin again, with a blank slate. They must start by figuring out what their customers really want, rather than what can be sold. And they must combine the do-or-die urgency of a startup with the let’s-break-things rebelliousness of a technology company. The stakes are high. A successful new greenfield business could represent 10% or more of a big firm’s revenue, delivered at a fraction of the cost of traditional products. Even one or two hits could kick-start a lumbering firm. The alternative? Established firms can stay on their current path and allow fintech rivals to grab market share by the day as increasingly digital global customers embrace new offerings that work when, where and how they want.

A successful new greenfield business could represent 10% or more of a big firm’s revenue.

Fintechs deserve much credit for breathing new life into an industry whose chief product — the movement and storage of money — is electronic, yet whose processes are so cumbersome that clients are sometimes left wondering if the phrase “customer service” is an oxymoron. Fintechs are showing how new technology approaches can win customers. Nonbank trading businesses such as XTX and GTS have vaulted into the top five market makers in foreign exchange in just three years, with platforms that run at almost half the cost of the largest banks’ offerings. In consumer banking, digital “neo-banks” are targeting millennials, with South Korea’s Kakao attracting six million signups in less than a year and U.S. entrant Chime opening more than two million accounts.

Most established financial firms, by contrast, are hamstrung by a hodgepodge of legacy technology systems and cultural and organizational inertia that make new products slow and costly to develop. It takes traditional banks anywhere from three to six months to launch offerings that fintechs can introduce in two weeks. Yet big, established firms have huge natural advantages. Among them: big balance sheets, vast troves of data and extensive reach that allows them to roll out new offerings to a huge base of customers on day one. If they were to fully embrace the greenfield approach they could beat fintechs at their own game.

In a greenfield project, a firm creates a standalone venture using brand new technologies and interdisciplinary teams with a mantra to learn fast. The venture pores over data to figure out what customers really want. Everything is digital. Funding is doled out in stages, only after certain benchmarks are reached — no progress, no more money — modeled after the venture capital and startup game. Multiple projects can vie for funding simultaneously. It is like a startup incubator, with one important difference: There is far greater customer access and engagement from day one. If a new offering catches on, it will be scaled up. The greenfield business helps the entire firm become smarter and more efficient, sharing the customer insights gleaned along the way. The incubator approach allows the firm to try multiple ideas at once and, just as important, to bring multiple new perspectives back to the larger firm. To date, only a small handful of true greenfield projects have been launched, mainly in Europe. One of the best examples is German energy provider Enercity, which launched a new greenfield platform in just eight months’ time.

The industry needs this kind of adrenaline boost, and established organizations need this kind of momentum to revitalize their culture and appeal to top talent.

So what’s holding back big financial firms, including those in the U.S., Greenfield builds are difficult to pull off. The portfolio needs to be ruthlessly prioritized and there can be no safety net. Negative forces inside the core company can’t be allowed to infiltrate the greenfield zone or slow decision-making at the top. Few firms are willing to grant the freedom needed for the incubation approach to play out. But the conditions are ripe for the model to take hold. The quality and cost of new technology are making greenfield projects financially feasible for the first time. Instead of taking the traditional “build everything” approach, the new model is about plugging components together. This works not just for getting to market sooner — it also provides long-term flexibility, since components can be swapped in or out as needs change. And at a time when the status quo simply isn’t working for big firms, greenfield projects can accelerate change across the entire organization. Startups challenge conventional wisdom. They experiment with products, technology and service providers. The industry needs this kind of adrenaline boost, and established organizations need this kind of momentum to revitalize their culture and appeal to top talent.

There is an old Irish joke about a driver in Tipperary who stops to ask a farmer how to get to Dublin. The answer comes back, “Well, I wouldn’t start from here.” So it is with much of the financial services industry. It is time to start again, and not from here.