Fintech & frontend innovation

The Burning Platform.

There's normally no better way to convince senior stakeholders to invest in innovation initiatives. The idea that at some point soon a new entrant could come into the market and destroy your current business model is enough to terrify many into action. In most industries it’s quite easy to make this argument: Google, Apple and others have entered most markets and made themselves felt. From the outside, it seems like the world of finance is no exception. Companies like Paypal & Transferwise have changed commerce as we know it and a new wave of challenger banks like Monzo have just begun to enter the market.

When talking to established banks and payment providers, though, it’s quite difficult to make the burning platform argument. Whilst innovation in finance has happened, it has only been seen in certain areas. Since the financial crisis, most funds and banks have seen their profits and operations steadily rise. The disruptive revolution, as it was prophesied a few years ago, has yet to be seen. So what’s happening? And what can we learn about how big financial players are defending themselves?

The benefits of legacy

Blockchain, the technology that powers Bitcoin, has been cited as one of the disruptive forces that is sure to completely change the way that financial services operate. If no central authorities are required to authenticate transactions then what need do we have for banks or payment providers? In theory, this makes complete sense. The problem, though, is scale. Bitcoin can handle, in theory, a maximum of 7 transactions per second. Visa can handle 56,000 a second. Whereas Bitcoin is a technology that has evolved and developed essentially as a proof of concept of a stateless currency, Visa and MasterCard have evolved as stable and scalable providers.

This isn’t to say that a cryptocurrency won’t come along to rival Visa or Mastercard’s transaction scale. What’s unlikely is that a completely new force will enter the market with a stable and scalable financial transaction system overnight. Innovation is inherently risky, meaning that early versions of innovative systems carry that same level of risk.

It might be tempting to think that if you’re a business operating in an environment where scale protects your core value proposition you can sit back and profit. The problem with this is that complacency kills you. Though it probably won’t be an overnight sensation that disrupts your business model, it will be a twist on what you currently offer.

Legacy can’t get the front end right

Nimble and fast paced responses to changing requirements aren't necessarily what you want when you’re processing money - which is why companies like Visa and MasterCard have done really well. I know exactly what I want from an infrastructure point of view when I make a transaction. I want my transaction to get to the merchant quickly, securely, and reliably. The requirements are known, and therefore large-scale providers can work away diligently on providing large-scale solutions to 100,000 people buying a hot dog at the same time when they're at a football stadium.

When it comes to the front end - what I see, feel and experience when making a transaction, I don’t have a clue about what I want. Maybe I want to buy my hot dog with a contactless card; maybe I want to put on a VR headset and beam the payment to the vendor. There is a keen need for experimentation where front end experiences are concerned. If a fintech company develops a novel front-end solution which makes, say, sending payments to friends easier, the innovation won’t be on the backend as the money still has to move through the usual channels. Instead, it will be through an advancement in user experience or tie-ins with other services.

Waiting and watching

Forward thinking financial organisations have realised that the best argument for investing in innovation isn’t that their business model will be destroyed if they fail to fund a lab. The most persuasive argument is one about growth.

Large organisations will never rival small and agile fintechs when it comes to designing novel user experiences and front ends. By waiting and watching as smaller and riskier companies try to develop revolutionary new ways of interfacing with the world around us, the innovation process for large companies is de-risked. But their involvement has to come in somewhere so that they can profit eventually - and where better than their area of expertise: the back end.

MasterCard was one of the first companies to realise that this approach could be particularly fruitful, and they’ve had a large focus on developers and APIs for a long time. By engaging with startups and smaller companies; encouraging them to build their front-end technology on top of the back end of their well-established system, MasterCard has been the payment provider behind almost all the fintech card providers you care to mention.

To think of innovation as building up defences against the disrupter that may come tomorrow is to miss the core point: you can’t fight a battle on both fronts. Collaboration with others is essential - not only to the future of your business surviving but to it thriving too.