Deutsche Bank's attitude to fintechs indicative of need for more open approach to innovation, says expert

Out-Law News | 11 Feb 2016 | 10:39 am | 2 min. read

Banks should embrace the opportunities that collaboration with financial technology companies offers them in responding to the digital challenges they face, an expert has said.

Financial services and technology law specialist Yvonne Dunn of Pinsent Masons, the law firm behind Out-Law.com, said it was refreshing to see Deutsche Bank champion collaboration with financial technology companies in a new whitepaper (28-page / 3.19MB PDF) it has published.

In its paper Deutsche Bank said bringing together banks' "core competencies", such as their client knowledge, regulatory expertise and global reach, with the nimbleness of financial technology companies and their capacity to use technology to innovate could help banks exploit the business-to-business (B2B) e-commerce market.

"The Deutsche Bank paper is a refreshing acknowledgement from an established bank of the changes happening in their markets as a result of the rise of fintech businesses," Dunn said. "It would be easy for an established financial services business to view fintechs as a threat and as trying to steal a 'piece of their lunch'. It is therefore encouraging to see Deutsche Bank highlight the opportunities banks can explore by collaborating with fintechs."

"The report is also indicative of a broader engagement being seen across other industries between established companies in those markets and new digital disruptors. There is increasing acceptance of the need to move away from a closed, proprietorial approach to innovation and instead look towards partnership agreements and other types of collaboration to flush out and harness new ideas. Embracing the concept of open innovation does raise a number of challenges for companies around contracting and ownership of intellectual property, among other things, but the potential benefits of the approach is already pushing many prominent businesses to embrace it," she said.

In its whitepaper Deutsche Bank said that regulatory issues and cultural and infrastructure limitations can constrain innovation in banks. Equally, however, financial technology companies also face a challenge in coming to mainstream prominence, it said.

"Two of the greatest difficulties fintechs face – particularly in the B2B market – are access to a sufficient client base (of corporates and their treasurers) and the ability to successfully scale-up a functioning solution for mass usage," Deutsche Bank said. "While nimble and innovative, these corporates often lack the necessary global reach, processing infrastructure, financing capabilities and client-knowledge and experience to translate an in-demand market solution into a viable vehicle for long-term growth."

Deutsche Bank said that "a shift in mindset from one of competition to collaboration" could help "revolutionise the payments market and wider financial sector for the benefit of all". It said financial institutions need to think about which parts of their business they would like to retain and whether there are other areas where "partnerships would deliver better value to customers".

"For banks, the fintech culture and role as disruptor can be used as an advantage, with fintechs’ position outside of bank walls providing the necessary gateway to innovation," Deutsche Bank said. "Partnership projects can exploit a 'sandbox' approach to experimentation – with the freedom to test new ideas away from banks’ infrastructural and cultural constraints – and can sidestep internal obstacles to innovation, such as over-familiarity with antiquated payment methods, or the parameters imposed by investment or regulatory pressures."

"For fintechs, entering into equal partnerships with traditional banking providers is an immediate way to address a lack of payments-market experience or regulatory expertise; leveraging synergies and creating a stronger proposition by bringing together the core competencies of both parties. Such partnerships allow fintechs and banks to offer clients cutting-edge added-value digital services while co-educating and sharing the burdens of compliance, risk and investment costs," it said.