The inspiration for this weeks musing come from an article on fintech news: Banks vs. Fintechs.
With Malcolm Turnbull’s government announcing an #ideasboom over the last week, now is a great time to discuss who and where innovation can come from. We say can, rather than should, as innovation is possible from anywhere. However, there is a difference in risk, execution and what the innovation represents.
Firstly, why innovate?
This one is simple: if you don’t innovate, you get left behind as others innovate and find better ways to do things. Innovation also comes in various forms: incremental innovation does continually happen but large leaps forward are also possible. Here we are talking about a leap forward in innovation to create competitive advantages and new systems, something that incremental innovation cannot get you. The mathematician inside me reverts to bifurcation theory: a leap represents a change in behaviour that impacts the way we do things. It’s going from doing things efficiently one way to re-writing supply chains, processes and technology to gain much more efficiency. This can occur through a number of ways, including recessions, but we also want this to occur occur by risk taking, investment and partnerships.
Innovation aims to create better outcomes for people. Better products for consumers, better environmental or social outcomes and better financial returns for those who take a risk.
What is improvement in financial services?
This comes in two formats. We can have cheaper/faster, which is an efficiency drive. We can also have a better or new product outcome, which might have less risk, greater significance to life goals, more suitable or open up new business or personal possibilities, such as greater certainty, flexibility and security.
Can banks do this?
Yes. However co-ordinating on a new idea and allocating resources on an unknown before any advantage is seen is difficult. Banks are better positioned to use their financial resources and expertise on incremental improvement, and they do. But how do you know where to put your best developers or financial engineers? Do those teams have the ability to pivot ideas and effectively adjust their mandate?
What do FinTechs bring?
True experiments, with higher probabilities of failure but higher rewards, are better done in start-ups. The overall cost is lower as a FinTech can attract top quality engineers (software and financial) who have belief in a vision before it is known if it actually works. They may even need to run multiple experiments (read business failures) before they get the right formula, see the feedback from prior experiments to create the final solution.
Best solution for Australia
Forming partnerships between banks and FinTechs are key. The blended solution brings the best of the 2 groups but also allows freedom for each to operate, including servicing an existing economy and manage uncertainty with the development of the future. This should drive higher returns on capital for banks, improved products for the public and export our expertise, which will create more jobs for the next generation of Australians. FinTech has the potential to create and support 100,000 Australian jobs over the next decade.