Navigating FinTech Partnerships in a Regulated World

Frank: 00:10 While innovation and uniqueness in USP is great, please be aware that there is a downside to it. Too much of it can be non-conducive to cooperation.

Sponsor: 00:22 This podcast is powered by Vestr, the engine behind Active Management. Vestr is a Switzerland-based fintech startup that provides software for issuers of actively managed certificates to automate their value chain fully. Visit Vestr, V-E-S-T-R dot com to schedule a meeting with an expert and to learn more about Vestr.

Stefan Wagner: 00:44 I'm very excited today. I'm here with Frank…, who I've known for a very long time, and I've been asking and bothering him for a long time that he comes on to my podcast. I'm very excited we finally managed to do it. So, good morning, Frank.

Frank: 00:59 Good morning, Stefan.

Stefan Wagner: 01:00 I'm very excited to have you here, particularly as we're going to talk about a very exciting topic that is really close to both of our hearts. the digitalization in the financial industry. You have experience that today you will talk from the financial servicing side from the big bank side basically and I will be the fintech the young start the dynamic the agile whatever you want to call us but obviously we are trying to be viable and interesting for large institutions and when large institutions first step is for them to decide between do we build ourselves or do we opt to basically work with an external company like a young startup. Obviously, somebody at the top has to make that decision, but what is sort of in their mind when they have to make these decisions, and how can the FinTech, in a sense, position themselves in a way that makes them more attractive, viable, realistic option.

Frank: 01:55 Interesting roleplay here, we have the same age, but you're the young and wild and I'm the old and established. No, I think that there are two key dimensions one needs to look at. One is innovation and competitive advantage that a large corporate, any corporate wishes to draw out of it. On the other side, the risk management dimension is of critical importance in regulated financial services. And I think, be it as an actor of the established world, but also as an actor in the up-and-coming world, it's critically important that that dimension is genuinely embraced. 

There are good reasons why companies may wish to control the inner code and logic of anything they do, including technology and the innovation that comes with it. Take the military industry, take the automotive industry. Electronics play a key important role there. Take our world financial services, go into algorithmic trading, portfolio management. Sometimes you wish to own and control what you have there. Take AI more generally, general theme. Owning and controlling the algorithms can be of importance. So, the decision whether or not you go external and partner with someone that helps you is not a trivial decision to start with.

Stefan Wagner: 03:14 So in a sense, is it a USP if I keep that knowledge in-house and don't share it, let's say, with my competition versus calculating the correct NAV? Anybody should be able to do this. That's not really a USP.

Frank: 03:27 USP versus commodity, but conversely, of course, you and others, the standard pitch is we are innovative, no one else can do what we do. Well, that may sound great from the perspective of a young up-and-coming company, but that may be a risk flag for a large corporate, because if it's really and truly unique what you do or what the company does, an external new startup, that may suggest, initially at least, that what the company does is not replaceable. 

So, when you engage with that company in a core activity of a regulated financial service industry, you create a form of dependency. And appreciating that dependency and that, you ask, what is on an executive's mind, that trade-off decision between being highly innovative on the other side, but at the same time, not being unduly dependent on someone. So, while innovation and uniqueness in USP is great, please be aware that there is a downside to it. Too much of it can be harmful or can be non-conducive to cooperation.

Stefan Wagner: 04:37 What are sort of the biggest roadblocks for large established institutions when it comes to working with call them fintech companies or startups? At what point do they become legit and acceptable vendors?

Frank: 04:54 When you as an executive decide to partner with any external, but here we talk about young externals, you want to be sure that your partner, the partner you choose, whose technology or innovation you potentially implement in a core, time-critical, business-critical part of your business, that that partner is around for the long term. So financing standalone financial solidity is certainly something that's relevant financial runway. And even in a situation where, and that happens from time to time, where ultimately your partner, your chosen partner does not survive, right, is not around for long term, what the bare minimum you need is enough time, enough runway to correct your decision. 

That could mean to either roll back, to build yourself or choose alternatives in the market if they actually exist. So that's certainly one consideration. The solidity of the investors in the background plays an important role. The alignment of interests between investors, management, and the clients plays a key interest. You want to see VCs being backed by investors that can follow through. But Stefan, if we turn this the other way around, I shared what the established players think, what's on their mind. What would you actually suggest we or large established companies should really ask? What are the key questions that you're sometimes surprised that you don't get?

Stefan Wagner: 06:34 Yeah, I think you pointed on a few things already. I think it was very good, but I think many fintech companies, the first original idea was basically they started with the aim of replacing the existing financial players in the financial service industry. I don't think in many cases that worked out, but I think it's one of the things these banks should look at. Is this fintech want to come in and help you build something or give you something or are they also potentially want to compete with you directly like in the sense if your end client calls the fintech company out will they suddenly say yeah, we can do it for you as well. So are they very clear in what they're actually doing or they're just trying to be basically you know find out enough so they then can go behind into your end client because that's many people started out that way. 

And the other thing is found out how much true domain knowledge is in the organization. Because initially there's often only one or two people, maybe the founder and his CTO or something like that. But how much real true domain knowledge, not in on the technology side, but about the product itself. There are so many things, for example, in banks I always find they cannot read up about it. If you have not worked in it, you don't know that bit. You mentioned the ownership structure. I think that's very important because incentive structures really drive behavior. 

And I would say inquire about potential red lines, yeah? Because sometimes banks don't understand that there are certain red lines where the fintech has to stop because it potentially could put the overall little company at risk, you know? But that gives you also really good opportunities by saying, you know, is there something I could get cheaper if I pay you, let's say, semi-annual fee upfront? Probably many startups will say, you know what, if I get the money today, I'm very, very happy to give you a discount because it's often the way We send an invoice after six months and then we chase banks for months on end to pay. And, you know, that's not much fun when you are trying to manage your liquidity as a startup.

Frank: 08:50 I would agree, Stefan. While there's the banking rule number one, banks have no money, you're right in saying cash flow, managing cash flow is not a dimension banks, financial institutions are overly concerned with.

Stefan Wagner: 09:02 Now, maybe go a little bit further here. Is Fintech companies sort of, as I mentioned, sort of promised to replace banks? From your side, in your experience, what you've monitored, did some of the FinTech’s actually over-promise, under-deliver a little bit?

Frank: 09:19 Tricky one. Yes and no, I shall say. Yes and no. There may have been over allocation of capital and financial resources. Remember, capital was cheap back then, as we went through the interest rate cycle. Pair this over allocation of resources with, as so often with new trends, with over enthusiasm, the desire by some of the actors to control the narrative, to dominate the narrative, and combined with that, at times, not always, also certain measured self-interest. Does that sound familiar? Is that something we've seen in other areas before? Yeah. Probably yes. 

So, markets and trends typically and mostly overshoot. I would say there was no exception here in case of FinTech. And the second observation really is that initially, while there were plenty of good ideas and plenty of technology-driven thinking as to what one could do, there was a broad, not to say gross, underappreciation of what it actually means to operate and deliver in a regulated financial services framework of banks. And if you move away from B2B and go to B2C, what we've seen there is, in some instances, really a race to the bottom pricing development, which has poked holes in some of the business plans of the young and upcoming. 

But quite frankly, raise to the bottom pricing, pricing below the cost of capital, that's not an invention of FinTechs. If you look at banking, if you look at European banking today, can't be and won't be specific, but it's certainly something you can observe in other areas as well. So on both fronts, B2B and B2C, I think FinTechs are in good company with their clients. On the other side, the costs of operating and the complexity of operating in regulated environments has probably been underestimated. And as we said initially, there has been just an exuberance initially, over location of capital, enthusiasm, and a spun narrative.

Stefan Wagner: 11:30 I mean, one of the challenges, particularly in B2B, is often the very long sales cycle, but they're also on top of it quite cyclically. So, you know, I always find just before the summer holidays, everybody gets busy again, you know, makes decisions, and the same thing after the summer, just before things. And in between everything sort of moves at snail pace basically. Why is that in a sense? Why is the cycle so long? But why is it also so cyclical?

‍Frank: 12:02 First of all, it's not only a subjective observation, it is correct. It is important to understand and appreciate that institutions, large corporates, particularly listed ones, have their own rhythm and call it seasonality, just like Mother Nature, right? There are financial planning seasons, there's shelter meeting seasons, there's recruitment seasons, objective setting, performance assessment, bonus seasons, something many people look at. So, this cyclicality is real. If you want to pitch your ideas and get into a company, at some point, your project needs to get into the financial plan of that corporate. 

That is typically something for the first quarter. Many assume plans are done and dusted at the end of a year. Basically, you start 1st of January already with an approved plan. The reality is slightly different, I can say. Often, very often, it is the first quarter of a financial year, of a calendar year, where plans get finalized. Right thereafter, often there's the performance assessment and final bonus season, followed by shareholder season, and then you're in May. Which explains why shortly thereafter, everyone has the new agreed targets, there's a new agreed financial plan. The second quarter is a quarter always of high, high, high activity. 

And that is what you seem to have observed as well. Shortly thereafter, there is summer, and summer remains a reality. Markets are calmer, organizations are calmer, beating Europe, even the US, summer is quiet. Thereafter comes the third into the fourth quarter. This is when people remember what their objectives for the year have really been, and when they start ramming and paddling again. And here we go again, you're ready, end of the year, next planning cycle. So really appreciating that seasonality, understanding it, embracing it, incorporating it also in your sales management and project management is important. It's a reality, it's not just a subjective perception.

Stefan Wagner: 14:07 I'm glad to hear that. Good deal. Now, in that process, there's clearly critical stakeholders. How do you best manage them?

Frank: 14:18 A project stands and falls with a sponsor. That is the person that ultimately says yes. But that person, as much as he or she would like to do it, can't be and won't be allowed to act alone. Behind that person that needs to say yes, i.e. that needs to spend the money, there's the long, long queue of chief experts with their opinion, all the other CEOs, that can say no. And every single no, if it's a legitimate no, can kill the project. So it is important not to belittle the fact that there are so many views. We've talked about the fact that the industry operates in a highly regulated legal framework environment. Bringing all those people on board is important. 

And it's not about naysayers. They typically try to find constructive ways, which, by the way, is good guidance to young companies to engage with those. There's a tendency to engage primarily with the sponsor, the person you want to convince to spend the money. But you may have to invest an equal amount of time in bringing on board the chief experts, the opinions, the head of legal, the head of compliance, the head of cybersecurity, the head of IT, the head of IT architecture, the head of data modeling, and bring all of them on board. Work constructively with them. They're not there to say no, unless A, they see an unsurmountable problem, a binary problem, or, and that's back to procedural justice, they may become very inconvenient or not to say complicated if they feel they have not been part of the process and haven't been shown the due respect.

Stefan Wagner: 16:03 Yeah, it's definitely the challenge is can we bring them into the project early enough so we can actually talk to them.

Frank: 16:12 So on the point of seasonality, Stefan, which we talked earlier, if we flip perspective or change perspective once more, what is it that… established corporates, the larger ones, those with longer financial runways and more financial muscle and institutions that don't have to manage cash flow, what could they do and how could they interact better in a more cooperative way with the young startups and the innovative companies of today?

Stefan Wagner: 16:40 I mean the first that comes to mind is exactly what you spoke about it is give us access to all the stakeholders. Let us also speak maybe with legal or your data security people a little bit earlier because in many cases we already have been through this. It's not the first time we're going through this process. We probably know 80% of the issues they will raise, and we probably have found answers with other clients. So giving us early access so we can start a dialogue with these people. I think give us clear, in a sense, metrics or what is expectation management, so we can agree on when and where we want to do certain things. And in a sense, tell us, what is your business model? Where are you making actually your money? Are you making money on assets under management? Are you making money because you're trading? Are you making the more clients you onboard? What is actually your level in the business that you're trying to achieve?

Frank: 17:46 It's just sense that banks often don't know themselves or that they want to not share that information.

Stefan Wagner: 17:54 They don't want to share that information sometimes, but the information flow sometimes is very one-sided. You know what I mean? Often, the first question is, how much does it cost? It's so often the first question when we show something. And we're like, yeah, but what do you want to do with this thing? Because we often align our fee models with their business model. Because we want to grow with our client. Do you need a truck from us? Do you need a race car? What is it you need from us? For that we need to understand your business model. 

Obviously, we treat this with absolute confidentiality, there's no question about it. We can even give you some tips, you know, where you might want to look somewhere else. This doesn't work. Oh, have you actually looked at a different jurisdiction to set up a structure product issuance vehicle there? And it's not that we're telling them something secretly, it's actually you can look it up on the CSF website, for example, but they never knew about that, you know, we can point them in the right direction. And it helps a little bit if we understand the difference between business P&L and management P&L, yeah? Because that often drives their behavior as well. It might be that the person we're actually talking to only will see part of the revenue generation that the overall bank generates. 

And that will help us understand why he needs certain ways or certain fee structures in a certain way because, you know, he has to manage his P&L that he reports up in a way. Fair enough. I think open banking, you know, open APIs, you know, is incredible, makes it incredible flexible and fast to implement or adopt things on top of it that we can build. And the other thing is banks have huge amount of data internally about their clients, about trading, about markets, share that data so that we can analyze it and help you adapt it to the right way and drive innovation. 

Obviously, the onboarding process for us always an incredible really long-winded thing because we always have this question. It's really funny. How quickly can you implement? And we're like, we can do this in two to three months. But that's after procurement, after data security, after that, and that might take a year. Coming back a little for my question, I want to ask you another question. What are the most relevant KPIs for financial service providers when it comes to digitization projects with external providers? As I said, everybody first asked, what is the cost?

Frank: 20:35 Absolutely. It's not primarily about costs. Cost is relevant and will remain relevant, but that's not the key driver. The management of transformation, implementation, and migration risk and that combined with the ongoing dialogue and relations any financial service for company has and has to have with its supervisory autologies, that is critical. The certainty of implementation, the certainty of the success of a project, the success to implement it on time and in a compliant way is one of the key considerations and the key KPI that one has. 

If you have gone through a project and already 80% there, the key thing is it needs to be delivered. And while you do that, you need to definitely avoid any collateral damage and fallout on the sidelines, be it vis-a-vis your clients, i.e. the banks and clients, the market out there, or be it vis-a-vis the supervisory authorities. And either one of them, be it trouble you have with your regulators or trouble you have with your clients, make it immediately into the media. So beyond costs, you see that's really the dimension. You need to avoid that. You want to avoid that.

Stefan Wagner: 21:53 Yeah, I think we tend to forget that. Now, we all talked about how to get to there, how to get on board, how to help the decision making, how to speed up things. But once the project has been decided, everybody gets excited, the necessary funding has been obtained, you prioritize resources. You know, got all the internal sign-offs that come with it. But then we often experience what we call scopes creep, you know, creep. It's, we thought we're doing this one, and then while you start to implement, you suddenly figure out, hold on, the client actually is now changing what you want to use it for or what it's actually supposed to help him with. How do you avoid something like this?

Frank: 22:38 may sound simple but hold the line hold the line communicate clearly sufficiently frequently but also at sufficiently senior level about what you what you observe scope creep if it happens of large projects often stems from miscommunication it's not or a lack of attention to detail for at the start it's not an inbuilt implicit or explicit strategy to get more out of a vendor, right? Quite frankly, maybe that happens from time to time, but in 99 out of 100 cases, that's not the case. It's the organization, the bank decision struggling with its own complexity, and the necessity to really go into detail in areas that you may think are not important, but the bank forgot that they were important or they later appreciate that they're much more complex than they initially thought.

Stefan Wagner: 23:32 I mean, you have seen this now over a long time developing. I even can remember when we started out five years ago, you know, SaaS solutions, software as a service, you know, in the cloud. was not very much accepted. Now it's completely normal. Everybody seems to be accepting it. What other evolutions do you think will come in the future?

Frank: 23:53 The overall fundamental trend, I think, is worse very much in favor. You talked about cloud, understanding, understanding and appreciating. It goes both ways. Sort of the sensitivity of data and the treatment of data is of critical importance. AI will play a key role also in financial services. AI sounds like a buzzword, it is a buzzword, but what it starts with is data. Without data, no AI. The rollback scenarios we talked about at the very beginning, the possibility for institutions to rollback outsourced solutions are often abstract concepts that have not necessarily been tested. I would not be surprised if either at their own initiative or driven by regulators, there will be more and more the demand on testing those rollbacks to see whether it is actually possible.

Stefan Wagner: 24:47 Now, if a project now is implemented, it works, you don't have to roll it back, how do you in the end then measure the success of a fintech partnership once it has been established? How do you approach that one?

Frank: 25:05 Measuring success is not necessarily a science. It's a bit of an art. There are some quantitative and also some qualitative dimensions to it. But feedback is critically important, and feedback can come from multiple sources. It can be the feedback that a bank, that we obtain from clients. Equally important is also internal feedback of users of applications. So you may say, okay, how do you quantify that? That's why I said it's not a science, it's an art.

Stefan Wagner: 25:35 I would say on our side that the interesting bit is looking back, that often, yes, okay, we got a new client, we got a new revenue stream, that's all great, but what it left with as a feeling inside the organization, as a memory, is often also how the project went, how people treated each other in that process.

Frank: 25:56 As you rightly say, the form of collaboration and cooperation The mutual basis of trust or the basis of mutual trust. And again, the timely and compliant delivery. The second dimension, we said qualitative and quantitative, is really around growth. And that is the more measurable thing. in a successful partnership, both parties grow together. You as an executive, you as a responsible project manager, you are happy not only if the project is delivered with success, but if you see the vendor grow, because then, with hindsight, you made the right call. And that is good for both parties.

Stefan Wagner: 26:37 Thank you. Thank you, Stefan. It was fun. Excellent. Very good.

Sponsor: 26:55 This podcast is powered by Vestr, the engine behind Active Management. Vestr is a Switzerland-based fintech startup that provides software for issuers of actively managed certificates to automate their value chain fully. Visit Vestr, V-E-S-T-R dot com to schedule a meeting with an expert and to learn more about Vestr.

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