FinTech has received much attention in the last few years. The financial services sector is often sluggish to change. It has real challenges in adapting legacy systems, to leverage new opportunities.
In this environment, new start-ups with no legacy baggage and an agile mindset can reap massive rewards and change the foundations of commerce. PayPal may have started this David to Goliath dynamic. Still, there are plenty of others who are now following, and it is affecting all lines of business: The UK's Nutmeg is active in Investment Management. South-East Asia's Grab is entering the digital banking sphere. And even Facebook (with the founding of the Libra Association) is aiming to become part of the global payments infrastructure.
Large financial institutions are facing the biggest challenges
For Daniel Liebau, Lecturer at Rotterdam School of Management, Erasmus University (RSM), the challenges for the large financial services organizations are deep-seated ones. Daniel Liebau has been involved in FinTech since the late 1990s when he started his career at RTS Realtime Trading Systems, the FinTech in financial markets at the time. He finished his corporate career as the COO and board member of HSBC Securities in Singapore. Now he runs an advisory business, Lightbulb Capital, focused on all things "Innovation in Finance."
In the big banks "everyone worries about managing risk down, but innovation needs experimentation." How to navigate this conflict between 'managing down risk and experimenting' is the solution everyone in banking needs to practice, he says, and this is not easy.
Big financial institutions have three lines of defence, Liebau explains:
- Business lines managing their specific risks in Payments, Global Markets or Corporate Banking.
- Internal Audit – the compliance and regulatory departments within financial organizations that check everyone is following standard operating procedures.
- External Audit – the as third parties that "check on the checkers."
Experimentation as the basis for creating successful fintech initiatives
"How many departments can you name that are in charge of innovation in a bank?" Liebau asks, before answering "we can name about eight different departments that manage down risk. But then when we ask about who is in charge of innovation, well that is a little bit more difficult to pinpoint, right?" Exploring this theme, he suggests "the front office person says, "Well, I'm here to make money, so it's not me." So it's basically the IT guy. And then the IT guy goes: "Well, I have to maintain the system from 1985 because we never had money to rejig it all. In a bank, you can quickly become a managing director of a function by just saying 'no' to everyone all the time. People would perceive that as, "Oh, this person is very aware of all the risks. So he's quite a careful guy. Very good. Get him promoted."
Join Daniel Liebau on RSM’s ‘Fintech: from Strategy to Implementation’ to develop a mindset for growth and for managing fintech opportunities in your organization
Dates: 3-5 June, 2020 │ Format: In-class study │ Location: Rotterdam
Experimentation is what lies at the root of Liebau's approach to creating more successful fintech initiatives inside of large organizations. He is not advocating throwing caution to the wind; however, "I'm not criticizing [compliance and regulation] because things have gone very wrong multiple times. So, it's probably all warranted to some extent," he says "but that is not how you create a business and new value" he emphasizes.
Why having an innovation culture is vital for creating change
So, how to create change in large organizations? "We believe that an innovation culture in a company is vital. For people to have the right growth mindset is the basis of it all. You can have the best technology and the most fantastic methods, like agile and design-thinking, but if the culture is not there, you're still going to fail." In his class, Liebau says: "we want to give some practical advice on how to ‘do’ innovation in a large financial services firm. We focus on all the hurdles that it comes with. Of course, understanding the necessary conceptual frameworks and new technologies, like machine-learning or blockchain, is also part of it. We spend time on making sure that people understand the basics of these emerging technologies that people might use to optimize their business." But ultimately it requires socialization of novel ideas and concepts across the organization. And that can only happen incrementally over a while, as more people become animated by the benefits of being more experimental.
Liebau is hopeful that things can change. "The few people that make things happen in these organizations, they get lonely, right? And they need some others to drink the Kool-Aid a little bit. So, for them, our class can get people in the departments that are traditionally not focused on innovation, up to speed with the 101 of FinTech and innovation and finance. We hope for a positive effect on making things happen in a better way."