Innovation

Deutsche Bank: How To Make FI/FinTech Partnerships Work

David Watson of Deutsche Bank contributed the following piece as part of PYMNTS’ Masterclass series, where participants in the world of payments and commerce can sharpen their competitive edge.

It may be conventional wisdom to assume that banks and FinTech firms are on opposite ends of the financial services spectrum, where large, asset-rich, traditional financial institutions (FIs) stand in stark contrast to small, bootstrapped tech upstarts, competing for clients’ attention and spend. However, these roles are shifting from competitor to collaborator — and from battle for market share to shared revenues amid shared resources.

The ongoing sea change of collaboration between banks and FinTech firms can offer a mutually beneficial relationship, according to Deutsche Bank’s Head of Cash Management Americas and Global Head of Digital Products David Watson.

There’s been a slew of announcements underpinning joint efforts between the two camps. Brought together, FIs and FinTech firms can help one another by working together to develop innovative products that can cement relationships with firms’ end customers, both corporate and individual. Yet, as Watson noted, collaboration needs a clear and present goal in disrupting financial services.

“The key to successful product development lies in the definition of the market problem. A successful product is always a solution you designed to address that market problem,” he told PYMNTS through a series of video exchanges.

The Strategy of Process

He said that for FinTech firms and FIs, collaboration on design, development, delivery and testing of those products for end clients is key — and continuous. The process does not change with the introduction of new technologies, he added, but it does allow for firms to address market problems in much more creative and faster ways.

“Understanding how you can make the products simple and intuitive for clients to use is key to success,” he said.

Artificial intelligence (AI) and open banking, for example, are “enablers” that help firms like Deutsche have a “wider brush” as they attempt to help clients solve problems.

Watson pointed to Deutsche’s announcement during the summer of 2018 when the firm acquired an equity stake in Modo Payments, based in the U.S., and where the latter will help Deutsche bring payments to non-bank platforms, spanning Alipay and WeChat. To bring payment transactions to mobile wallets and peer-to-peer (P2P) networks solely on its own would have been a much more daunting undertaking for Deutsche, said Watson.

Facing — And Embracing — Fragmentation And Regulation

We are in the midst of the most exciting times in payments, said the executive. He noted that “yes, things may be getting slightly more complex,” but there are new opportunities forming, too, through the twin engines of new technologies and burgeoning regulations.

Traditional finance firms, he said, can choose to “bury their heads in the sand” in the hopes that the business models of decades past will continue to drive top lines and profits, and keep clients happy. “Or you can embrace this change, partnering with [FinTech firms],” he said.

Banks have been regulated for a long time, noted Watson, in an effort to protect clients and assets, and to engender a spirit of fair play in the industry. Among prominent regulations lies PSD2, he said, which enables third-party providers — whether banks themselves or technology providers — with new competition in the marketplace.

In the age of open banking, data has new usage potential, which leads to what he termed “massive revenue potential. … At Deutsche, we view [FinTech firms] as competitors, but also as collaborators, and also major clients.”

He offered a glimpse into this mindset, telling PYMNTS that “one of the largest changes we see in this space is an ability for Deutsche Bank and other financial institutions to walk into a client and say, ‘Actually, we cannot offer a solution to solve 100 percent of your problem. We can offer this 80 percent, and it is state-of-the-art and best-in-class. But for this 20 percent, … we know this FinTech that we trust and have vetted, and we will bring them to the table to talk to you directly.’”

Against this backdrop, stakeholders leverage their innate strengths. Banks bring to the table their networks, clients, trust and banking licenses — combined with the speed, agility and focus on specific problems that FinTech firms have on creative solutions.

Beyond the aforementioned Modo Payments transaction, Watson mentioned the 2017 acquisition of 12.5 percent interest in TrustBills, a German trade finance FinTech. He also noted the deal earlier this year to acquire Quantiguous Solutions, based in India, to build an open banking platform.

“These are all strategic investments to help us access new products and services, and accelerate in those respective [financial services] spaces,” he explained. The cross-culture influx and influence is there, too. “When you bring those things together,” he said of FIs and FinTech firms linking up, “the power of product development can really be harnessed.”

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