Buy, don’t build: innovation in financial services

At times it is all too easy for large financial services businesses to feel unmoveable from their dominant position. In the past 30-40 years, we have seen some solid businesses swept away by disruption across nearly all sectors of the economy. Until recently, the financial services sector has been resistant to the kind of sweeping change wrought by technological disruption, but the wind is changing. For incumbents to prepare and adapt to change, they must find ways to innovate themselves.

What is the best way for incumbents to innovate? How should large financial institutions seek out and execute on new opportunities; and how should they stave off the challenges brought about by tech-driven FinTechs?

The first step
Innovation can never flourish in an organisation where the senior management aren’t educated in it or supportive of it. The very first step incumbents should take is to ensure that their senior management and board understand the topic of innovation, and the need for constant innovation. Only then will senior line managers know how to implement innovation best practices into their operating unit. Businesses can do this by bringing in external experts to train senior staff. Innovation needs to become part of the internal culture - only then will it filter down to the bottom line.

That though, is the easy bit.

The much harder part of incumbent innovation lies in the actual execution of innovation-focused initiatives: having or finding new ideas, building out new technologies, and testing different routes to market. One perhaps simplistic way of framing the options available to incumbents when it comes to innovation, is to look at it as a two-sided debate. They can source innovation internally, or they can acquire / collaborate with FinTechs.

The case for intrapreneurship
For those seeking to conceive, design and build their own proprietary innovations, there are pros and cons. The advantages of innovation on the inside of a business are that it can be cheaper, easier to test, there is often greater control, it can be faster, and the incumbent can use its internal resources to bolster the new idea. The disadvantages of internal innovation are that the incumbent itself can end up getting in the way. Compliance, legacy systems, being unwilling to really disrupt existing revenue models and being wedded to existing ways of working can make the process slow.

The case for collaborating and acquiring FinTechs
Alternatively, incumbents can go out into the market and acquire or collaborate with a FinTech that would solve a specific business challenge. This type of innovation is external and is the next step that will enable incumbent businesses to bring new products and services to market. This means incumbents can often obtain higher quality talent and highly motivated teams. They are also more likely to have fresh ideas, more creative thinking and are more likely to be invested in proven results. Often, acquiring or collaborating with a ‘ready-made’ start-up can speed things up, however there are accompanying negative side effects. It can be expensive, there is a greater risk of reputational damage or regulatory-failure and the integrated FinTech isn’t always brand aligned.

Why collaborating and acquiring FinTechs is usually the best answer
The killer point here is that it is often impossible for intrapreneurship to overcome the most existential threats businesses face in terms of disruption. This is because internal teams will always naturally seek to enhance, not disrupt, their company’s existing products and services.

By bringing in expertise that cares a little less about adhering to business-as-usual, and is a little more selfish in building products and services regardless of how they fit into incumbent business norms, you can better protect from the most severe winds of disruption.