BDD01 - Financial Technology

Enterprise Innovation

Pertemuan Ke 17 & 18
 Sub - CPMK
• Mahasiswa mampu menunjukan inovasi yang dilakukan oleh
perusahaan dalam mengatasi masalah yang berkaitan dengan
Finansial. (C3, A2)

Materi:
1. Can Banks Innovate?
2. Innovation Labs
3. FinTechs and Banks - Collaboration is a Key
4. Partnerships Are the Key to Addressing Financial and Digital
Exclusion
5. Corporate Venture Capital
6. The Insurance Opportunity
1. Can Banks Innovate?
 1.1 Can Bank Innovate?
• Banks build things all the time. They have
well‐established procedures and guidelines to do this
that are extensively used and well‐tested.
• To build new propositions, the innovation team within
a bank needs to learn to apply the same approach to
innovation propositions.
• Most new things banks build have certain
requirements in common. They all have:
– A sponsor with sway,
– Engaged stakeholders,
– Confidence of customer buy‐in, and
– A business case with a strong investment
justification.
 1.2 A Sponsor with Sway
• One of the key principles of delivering change in a
big organization is that things are built on behalf of
someone.
• Even the greatest ideas, without the support and
sponsorship of a business owner will not get built.
– A decent innovation that is actually delivered at
scale is better than a great one that is not.
• The most important point to ensure is that the
sponsor is committed to support a full‐scale launch
of the proposition if it is proven with customers and
meets return targets.
 1.2.1 What should we do with
Strong Idea without Sponsor?
• Shop the idea around to other potential sponsors
– If the product teams are not supportive, then
maybe the compliance teams, worried about
customer treatment, could be.
• Escalate within the bank’s hierarchy
– But this option often leads to political
complications and should be used sparingly.
• Wait and to move on to the next idea
– Good ideas do have a tendency to resurrect
themselves.
 1.3 Engaged Stakeholders
• It is best that the innovation team identify and engage
with the various stakeholders as soon as possible in
the lifecycle of the experiment, right after having
secured the sponsor buy‐in.
– Stakeholders include employee representatives
from Compliance, Fraud, Risk, Finance, HR,
Operations, IT, Procurement, and more.
• These are the people that can stop the launch of a
project.
– It is important to involve all interested internal
parties of an innovation experiment early on,
because if the stakeholders will stop a new idea it is
better for this to happen before too much time and
effort is spent on it.
 1.4 Confidence of
Customer Buy‐in
• The best way to understand if customers want
something is to let them use it. So the next important
step is to create a prototype that, as far as possible,
looks and feels like the end product to the customer.
• The real objective of prototyping is to get firsthand
customer feedback from a large enough sample of
customers to either stop the idea or put together a
realistic business case.
– It is important that a prototype is both inexpensive
and quick so as to make potential failure affordable
and to enable the bank to run several experiments a
year, not just a handful.
 1.5 Business Case

• A strong business case is the key prerequisite for

building anything in a bank.
• This is a document that has structure and content
that is a reflection of a bank’s culture and beliefs.
• As such, it is fundamental the innovation teams
understand how to build one.
– Luckily, if they have got this far, they are likely to
have all the necessary components aligned.
 1.5.1 Business Case Needs

• Owner
– In this case the sponsor fulfils that role. He or she
will act as the advocate for the investment in the
proposition at the appropriate decision‐making
fora.
• Analysis of the return on investment.
– All the components are to hand. The results of
the prototype will provide the base data to
forecast a revenue number.
 1.5.1 Business Case Needs (Cont’d)

• Several of the stakeholders

– IT and Operations will contribute to the costs
analysis
– Finance will validate the financial analysis.
– Other stakeholders will ensure the business case
meets the regulatory, fraud, and compliance
requirements.
2. Innovation Labs
 2.1 Foundation
• Early decisions in setting up an innovation function lead
to different work dynamics and, as a consequence, to
fundamentally different innovation outputs.
• Key questions for management are:
– Do you have a vision about the level you want to play
at? Globally? Nationally?
– Are you focused on certain customer segments or
products?
– How do you want your bank to operate in five years?
– Do you want your innovation function to explore and
experiment in order to discover the path to that
“future state”?
2.1.1 Defining your
Innovation Labs
 2.1.2 The Choices
• The choices you make will lead to fundamentally different
ways of delivering innovation.
– Disruptive or incremental?
– Technology, product, service, or business model
focused?
– Betting on identity, big data, infrastructure, or
blockchain?
• One lab could be focused on disruptive product
innovation using big data, while another could be focused
on incremental innovation for customer experience.
– Both could exist within the same organization and also
in parallel with free experimentation.
2.1.3 Innovation Labs
Focus & Approach
 2.2 People
• People are definitely the most important resource for the
success of an innovation function.
• Innovation labs need:
– Project manager
– UX designers, the CX specialists, and people versed in
strategy and formulating propositions.
– Developers (not borrowed from an agency)
– Architects – people who know the bank by heart and
can tell you how or if a shiny new technology could be
applied in the real context of that bank.
• Just because “innovation” is young and hip, your lab
should not be exclusively a collection of young hipsters
 2.3 Methodology
• The premise of an innovation lab hinges on the
collaboration process of a cross-section of expertise.
– Therefore, a common “language” must be developed
to allow a service designer, who has never been
exposed to Financial Services, to communicate with
the banking decision-makers or architects.
• This “language” can be called Lab Methodology.
– Therefore, it is acutely important that the lab
methodology enables both “ways of working”.
• Methodology examples:
– Design Thinking
– Lean or Agile Methods
– Develop your own method
 2.4 Resources
• What makes the actual difference to the output of a lab is
what type of resources they have access to.
• Ideally, a lab would have its own
– Infrastructure.
– Collaboration tools
• Which enable them to communicate safely with
external organizations
– Access to platforms
• Where they can securely store and analyse data.
– Mini‐bank stack (optional)
• To which projects connect when needed and thus
the experiments are not lost, but rather they build
on each other.
 2.5 Governance
• As a heavily regulated industry, needing to operate
24/7 without fault, while dealing with highly
sensitive data, banks function according to strictly
governed processes and rules.
• The governance should contain a clear definition of
– What the innovation function needs to do in
order to have access to resources.
– What experts and governing bodies it needs to
consult in order to make sure the data is not
compromised and large risks are not created
through experimentation.
 2.6 Innovation “Consumption”
• Financial services have neither the culture nor the
experience of setting up innovation functions and absorbing
their products.
– While in the pharmaceutical, technology, and energy
industries R&D and innovation functions are by definition
at the heart of their competitive edge.
• Financial sector must learn how to incorporate innovation,
otherwise the future will slip straight through their fingers.
– There are countless stories of missed opportunities, too
painful to hear: Xerox not knowing what to do with Alto,
IBM letting go of the SAP founders … the list goes on.
 2.6.1 Expected Output
from Bank Innovation

• If a bank sets up a lab with a mandate for disruptive

innovation focused on the use of data with big data
technology, one would expect in a certain timeframe
to clarify the bank will create business value out of
data.
• Now, it is thus very important to align the way the
innovation lab functions with the type of output the
bank expects to get.
 2.6.2 Output Categories
• Most of the outputs from a typical bank innovation lab
could be included in one of the categories below:
– New feature(s) of an existing product and/or
platform (e.g. web, mobile)
– New product
– Identification of new technology or combination of
technologies for a specific use case
– Improved Customer Experience (CX) journey for a
particular product or channel
– Industry trends
– Strategy reports
– FinTech scouting and news
– New business models.
2.6.3 From Output
Into Actions
3. FinTechs and Banks -
Collaboration is a Key
 3.1 Collaborating Make Sense
for Both FinTechs dan Banks

• Collaborations between FinTech companies and

banks can take different forms. Some FinTechs are
bound to services that can only be offered by those
holding a banking licence.
• Some FinTechs focus on bank partnerships in order
to enlarge their customer base and at the same time
enrich the product and service offering of the
respective bank.
 3.1.1 Valuable Assets
• Unrelated to the stage in which FinTechs and banks
engage in a partnership, both bring valuable assets
to the table.
– FinTechs are tech‐driven, test new technologies,
and explore what is technically possible, not
being bound to legacy systems.
– Banks are usually risk‐averse and act much more
slowly due to their regulatory boundaries and
their liabilities. Their banking capabilities allow
them to open accounts, hold money, give out
credit, and offer other regulated products and
services.
 3.1.2 Lowering Barrier

• Further, bank can add their industry expertise,

regulatory, legal, compliance, and risk management
know‐how and can give FinTechs access to global
payment systems as well as their own customer
base.
• Overall, they can lower the barriers of entry for
FinTech firms into the financial services space and
provide customers in a partnership with an
increased level of trust.
 3.2 Needs for a Collaboration

• Depending on a FinTech’s needs and its status,

partnership choices are different.
– FinTechs need to make the choice whether a
partnership will accelerate growth or whether it is
wiser to continue to approach the market alone.
• FinTechs still in their set‐up phase need to respect
both regulatory requirements and the nature of
their business model in a decision to go for, or
without, a partner.
– As fully regulated entities, banks can support
FinTechs to manage regulatory requirements.
 3.3 Different Banks,
Different Benefits
• In searching for a partner, it is important to
differentiate between retail and transaction or
specialized banks, as both types have different
needs and wants, and both can be attractive for a
FinTech company, depending on a FinTech’s
development stage and focus.
• Bank Types:
– Retail Banks
– Transaction or Specialized Banks
 3.3.1 Retail Banks

• Partnerships with retail banks usually take place

once the FinTech:
– Has set up its business
– Want to rapidly enlarge its customer base,
– Want to increase customer trust,
– And/or the retail banks intend to enrich their
product and service portfolio.
• An existing retail banks customer base is attractive if
FinTechs can use it in the way they would like to run
their business.
 3.3.2 Transaction or
Specialized Banks
• Partnerships with transaction or specialized banks
are of importance in setting up a business model, in
case regulation requires licences to operate the
business.
– Usually these banks do not focus, or only to a
lesser extent, on end clients and are instead
focused on corporate clients such as distribution
partners or sales agents that maintain client
relationships.
 3.3.3 Transaction Banks
Characteristics
• Many of the transaction banks, which have opened
up to FinTechs have this characteristics:
– They have agreed on cooperative partnerships
– They offer their partners co‐ or white‐label
services
– They act in a way which is more similar to
start‐ups than regular retail banks
– They have created open infrastructures that allow
easy interfacing
 3.3.4 Analyzing Partners

• To avoid being stalled, FinTechs need to be well

prepared and, ideally, analyse organization and
decision processes on the partner side up front:
– How is my desired partner organized, i.e. who
benefits from the partnership, who does not, and
what needs to be done to foster
decision‐making?
– How are decisions made, i.e. am I talking to the
right people, who is making decisions – a single
person or a committee?
 3.4 Into the Collaboration:
Avoid Frictions
• Expectations and common guidelines should be set
very early in the partnership.
• FinTechs need to understand why traditional banks.
– Do not develop at the speed of the start‐up,
– Demand certain security levels (IT systems)
– Have publishing restrictions, etc.
• FinTech/bank partnerships that are not well
prepared can lead to great dissatisfaction and at
worst to a termination of the partnership.
 3.5 Why Collaborate at All?
• Fintech should start its business without entering
into a partnership, only if
– They can replicate the bank’s IT.
– They has enough money to set aside for the
bank’s equity capital.
– They can convince the regulator to get the
approval for a banking licence.
– They believes customer trust is not an issue.
• If this is too timeconsuming and complex, it should
look for the right banking partner.
4. Partnerships Are the Key to
Addressing Financial and
Digital Exclusion
 4.1 The Financial and Digital
Inclusion Imperative
• Many of our personal, business, and not‐for‐profit
customers are already taking advantage of the
power of digital.
– However, over ten million adults and more than
one million small businesses and charities in the
UK are not only missing out on the benefits of
digital, but are at risk of being left behind and
excluded from a society that will in the future
have digital at its heart.
• Banks and FinTech communities can and must work
together to reduce exclusion.
 4.2 Case Study Lloyds Bank:
About Us
• Our day‐to‐day relationships with our customers are
evolving, not because their financial needs are
fundamentally changing, but because they want to
interact with us in different ways.
– Their expectations of how we should serve them
are being set by how the best businesses in the
world harness digital.
• For this reason, we have established a
transformation programme to improve our own
digital products and services and help ensure we are
being digitally inclusive for all our customers.
 4.3 Case Study Lloyds Bank:
Digital Transformation

• In 2014, more than 40% of our customers’ new

product needs, such as current accounts, personal
loans, or credit cards, were fulfilled via digital.
– To keep up with this shift in customer preference,
we deliver enhanced propositions and
experiences to our customers every month (by
reinventing core services)
 4.3 Case Study Lloyds Bank:
Digital Transformation (Cont’d)

• One key part of our digital progress in this era of

rapid and pervasive change has been creating a
digital platform that allows us to quickly innovate
both internally and with the FinTech community.
– We are the first major bank to have a Digital
Division reporting directly into the Group CEO
 4.4 Case Study Lloyds Bank:
Collaboration is a Key
• FinTech points the way to our digital future and we
need to nurture and harness the creative and
visionary power of FinTech through strategic
partnerships, collaborations, sponsorship, and
championing of the ecosystem.
• Lloyds Banking Group is mobilizing around FinTech
and we are already reaching out through
partnerships such as the one with Startupbootcamp
FinTech Accelerator, where we were involved in
launching the first Global FinTech Insurance
Accelerator programme.
 4.5 Case Study Lloyds Bank:
Work Together Opportunity

• Many individuals and organizations are already

harnessing the power of digital. We cannot tolerate
digital exclusion and allow anyone to fall behind
• Lloyds Banking Group can and will play an important
role in helping provide the necessary access to
digital,
– But to harness its full power and make a lasting
impact, organizations such as ours and the
FinTech community must combine their strengths
and work in close partnerships.
5. Corporate Venture Capital
 5.1 Corporate Venture
Capital
• Corporate Venture Capital (CVC) is not synonymous
with, but rather a specific subset of, Venture Capital.
• How capital is mobilized and managed for return
varies considerably across company investor
profiles.
– The coming of age of the “corporate investor” in
FinTech is some way off, but if deployed
strategically in support of innovation, CVC
becomes a real contender in the investor
landscape.
 5.2 Corporate Investor
Driver
• The typical drivers behind corporate investment
mandate are:
– Strategy – to advance the future vision of the
enterprise;
– Expansion – to extend the company’s portfolio of
products and services;
– Innovation – to improve the competitive position and
enhance customer experience or take strategic bets;
– Finance – to improve the financial return of the
company
 5.3 Opportunity for Fintech
Ecosystem
• Dozens of banks and financial services companies
are already committing to “seed investing” and
many more are sponsoring large FinTech
accelerators around the world.
– The budgets for these activities are impressive,
with the average lab costing an average of $2
million to launch.
• Switching to the high‐profile CVC investments, there
is little evidence to suggest corporate strategy has
caught up or is supported by innovation and
investment mandates.
 5.4 Accelerating Open
Innovation in Fintech
• The need to innovate is impacting dozens of product
and service areas across the financial services supply
chain.
• The partnership needed between heads of
innovation, corporate venture, the CTO office, and
risk and compliance are all essential.
• For those FinTech‐focused CVCs who understand the
power of portfolio management stand a greater
chance of repeatable future returns
 5.5 Setting Up for Success

• If you turn to the CVC arm, many are

under‐resourced and desperately need
augmentation from experienced venture and
innovation professionals working with them, and in
the key global locations.
– Past processes and measures are unlikely to meet
the needs for now and the future.
 5.5 Setting Up for Success (Cont’d)

• The internal collaboration and fusion of planning

between innovation and investment functions is
vital.
– Structure, relationship to parent/enterprise,
talent/skills, approach to portfolio management,
and venture philosophy are all vital areas to
assess.
5.5.1 Key Question
for Success
6. The Insurance Opportunity
 6.1 Insurance Industry

• Insurance is a massive 4.64 trillion‐dollar industry, yet

most of the focus within FinTech has been on banking
(investments and lending) and payments.
• The issues faced by customers from the insurance
sector are very similar to those of banks, i.e. sub‐par
customer service, opaque pricing, and complicated
products.
• The trends of digitization, new distribution models,
and transparency that gave birth to many FinTech
start‐ups also apply to the insurance world.
 6.2 Distribution
• People are less inclined to buy insurance themselves,
instead engaging with agents who will typically
approach the customer and “push their products”.
– This has largely shaped distribution into an
agent‐broker type model where the agent’s role is
more about sales.
• Advances in technology and insurers’ desire to get
closer to customers (to better capture data and
provide a more consistent customer experience) have
started to change the distribution model, but the
emergence of digital distribution will change it even
more.
 6.2.1 Direct Distribution

• Some insurance carriers started direct distribution,

especially for simpler, one‐off products like travel
and motor insurance.
• Very few, however, went all‐in on direct insurance,
fearing competition with their own agent networks.
– As a solution to this classic innovator’s dilemma,
some of them have branded their direct offer
differently as “modified pricing and products” to
ensure agents will not be too negatively affected.
 6.2.2 Aggregators
• One of the most significant technology‐driven
disruptions in distribution has been the rise of
aggregators , which are websites that compare quotes
from multiple insurance providers.
• Aggregator sites started with simpler products like
motor and travel insurance.
• Looking towards expansion, their big challenge is to
find new products where customers can be
self‐directed.
– For this, they will need either simpler products,
requiring fewer data points for the underwriting
algorithm, or to find a way to provide better user
experience (by using public data / insurers
information)
 6.2.3 Blending Insurance
with Other Services
• The distribution model may also be changed by
companies providing services where insurance is
just one component. This may take many forms:
– An infamous example is payment protection
insurance (PPI) bundled with loans and
mortgages in the UK. This insurance policy was
said to be protecting its holders in case they were
not able to repay a loan or mortgage.
– Trov, a mobile app, provides a service that lets its
users catalogue and keep track of all their
belongings with their current value. This service
lends itself to insurance, be it motor, home
contents, or any other specialty P&C product.
 6.3 Big Data

• Insurance is the world’s first big data business as

companies have been using data to model and price
risk way before the term became fashionable.
– Insurers’ past loss and underwriting data is one of
their most valuable assets.
• However, the insurance industry’s lead in collecting
and making sense of large amounts of data is fading
quickly.
– Companies like Google, Facebook, and Amazon are
collecting much more data and have arguably
better tools and human capital to make sense of it.
 6.3.1 Privacy Concerns

• Using big data to customize insurance products in

theory is a step in the right direction, but it will
surely give rise to privacy concerns.
– While customers will enjoy better prices and
tailor‐made products, it is still uncertain how
intrusive they could find the very techniques that
make it possible.
• Consumers and insurers will need to find a balance
between discounts and the extent to which the
company owns customers’ data and profile.
 6.3.2 Security Risk

• Another risk of using IoT for insurance is

cyber‐security, or rather the lack of it.
– These smart data collection devices are not
always designed with security in mind.
• According to studies, 70% of the most commonly
used IoT devices contain vulnerabilities that a hacker
can exploit.
– This is not the kind of risk insurers can or would
like to price into their models.
 6.4 New Entrants

• Insurance is a tightly regulated market and starting a

new carrier is very expensive.
– Quick growth is also difficult as regulatory capital
increases with new customers.
• Yet, new entrants to this market could arrive from
two directions.
– First, from some of the companies who collect
vast amounts of data in their daily operations (the
Googles, Amazons, and Facebooks)
– Second, start‐ups could and will enter profitable
niche markets with focused, simple products
 Summary

• Innovation and digital change are changing the

banking industry. It is the role of the effective
Innovation team to help the bank understand,
accept, and deliver innovation to customers – even
without having to fundamentally change their
culture.
• The ultimate “innovation lab” would deliver an
in‐house full‐scale “challenger bank”. With the
budget of yet another massive transformation
programme, instead of trying to add a layer of polish
to systems on life support, the banks have the
option to build their own challenger banks.
 Summary (Cont’d)
• Partnerships between start‐ups and traditional
organizations such as those between FinTechs and
banks are not new. Banks have been very reluctant
to move into the FinTech space in the first place, the
number of collaborations between FinTechs and
banks has meanwhile increased enormously
worldwide.
• CVC should be a true business partner both to its
internal stakeholders and to its investment portfolio
companies. It needs to strike the balance between
strategic and financial returns, working always to
balance portfolio risk in either discreet investments
or co‐investments, but never alienated from the
innovation agenda or group strategy.
 Summary (Cont’d)

• While looking at new market trends and how

existing insurers could adapt is useful, digital
transformation has more mundane opportunities for
established players too.
• The simple digitization of existing insurance
processes (straight through processing of quotes,
rapid product configuration, etc.) could yield
improvement to profit margins.
• Combined with existing companies’ scale, if done
well and in a timely fashion, this too could make
existing carriers rather formidable competitors in
the digital age.
THANK YOU