On the same side
Financial institutions have been increasingly working with fintechs, creating innovation ecosystems sustained by trade, development and co-creation of value.April-July | 2019
The transformation of markets by the digital revolution has often been viewed by a somewhat polarized bias. On the one hand, there are solid and far-reaching traditional companies with the need of reinventing themselves. On the other hand, there are fast, malleable and specific startups, ready for the attack. This assessment indicates a shock – a disruption, when innovative business models reshape whole sectors without much notice. The banking industry was one of the first to get the spotlight in this scenario, with the outbreak of fintechs. The logic of confrontation between the traditional and the new, however, did not take long to adjust itself to the complexities of the new times and to open space to more sophisticated and productive ideas, such as partnerships and co-creation, within a market ecosystem.
In analyzing the current scenario of the banking industry, the report “Banking Outlook 2018: Accelerating the Transformation”, from Deloitte, indicated some positions that banks could take in the face of the progress of fintechs and the impact of their operations in the sector. The main ones would be: to replicate what fintechs do, to create solutions as innovative as possible or to favor the symbiosis in the current ecosystem instead of adopting a competitive position – or to adopt a hybrid approach between these strategies, according to the situation and the market position.
“Initially, financial institutions created internal structures of innovation, fostering transformation from within”, says Sergio Biagini, Deloitte’s lead partner for the Financial Services Industry. “However, we have learned that innovation does not come from a closed group, it comes through multidisciplinary groups with different backgrounds and perspectives, and also needs to be quickly tested and refined. The key to innovation lies precisely in the creation and enhancement of ecosystems.”
The symbiosis arises precisely from this movement, in which startups bring the unique look to solve specific questions with high technology and new models of action and the big companies support innovation with structure, experience, promotion and scalability.
Regardless of their size, financial institutions must foster and engage in ecosystems to actively participate in the disruptive moment we are in, Sergio Biagini, Deloitte's lead partner for the Financial Services Industry.
Open doors and eyes on the customer
Much of the opening given by the banking industry to fintechs came from a more realistic view. The “Banking Outlook 2018” report has already recommended removing the term “threat” from the approach. According to the analysis, the chances of the largest banks losing their market leadership to fintechs are minimal, due primarily to three factors; namely: regulatory barriers, the natural inertia of these consumers, and the lack of resources of entrants to acquire or replicate competitors.
With their gaze averted from the threat, attention remained to the opportunities. These are the fintechs’ specialty: the ability to quickly understand the consumers’ new needs and deliver something that exceeds their expectations. There are new demands that grow, in an accelerated way, also in Brazil. Mobile banking, for example, already represents a new frontier. In 2017 alone, 1.6 million accounts were opened through this channel in the country, almost three times more than in the previous year, as revealed by “Febraban Banking Technology Survey 2018”, conducted by Deloitte in partnership with the Brazilian Federation of Banks.
Also in 2017, for the first time, the number of accounts’ transactions via mobile banking was equal to the number registered in internet banking, of 59 million for each of the channels. Preference is already beginning to reverse: between 2012 and 2017, the average volume of transactions per account fell 53.7% via internet banking and grew 436% via mobile banking. “Mobile has been taking its place”, says Gustavo Fosse, sector director of Technology and Banking Automation at Febraban. “The technology brings so much convenience that it has extended the customer’s time. As consumers always seek convenience, they demand better banking experience.” Fosse’s vision sums up a scenario in which the customer, increasingly, awaits transformations – and the possibilities multiply. This is where collaboration between fintechs and banks has much to add.
Various models, various objectives
Conviviality within the new banking ecosystem can take many forms. Fostering programs and partnerships are some examples. One front that gains fans is coworking and incubators – or a mix between these structures. The goal is to build an open innovation environment, where entrepreneurs and their startups take advantage of structure and incentives, sometimes financial, in addition to a diversified scenario, where large companies and specialists circulate. Thus, they have what it takes to cut their business costs and enter the market.
By offering such programs, banks can address their own challenges, share information, and hope that, in the process of meeting expectations, new solutions will emerge. They can also, as if they were scouts, observe new technologies and processes at birth – and even support them as clients or with investments. By inviting other market partners to live in these spaces and participate in the programs, in addition to hosting startups from different sectors, financial institutions still stimulate one of the main characteristics of the disruption: the transversal and multidisciplinary character.
“By adopting this position, financial institutions are placed in a leading position, leading the digital transformation”, says Biagini. In Brazil, this has been the option of companies, such as Itaú, with its technological entrepreneurship center denominated Cubo, as well as Porto Seguro, with Oxigênio Aceleradora, and Bradesco, with InovaBRA, a platform for innovation and entrepreneurship.
Among InovaBRA’s many fronts of action, three stand out. InovaBRA Startups is a support program for nascent companies, with periodic selection, that supports entrepreneurs to validate their business models. At the end of the program, they have the opportunity to market their products to Bradesco and to be strategic partners. Another front is InovaBra Ventures, an investment fund with R$ 100 million that has already made contributions in three startups: Semantix, R3 and Cuponeria. There is also InovaBRA Habitat, a physical space where startups, from a curator’s office, can rent a space and integrate an environment that brings together, in addition to other startups, initiatives of Bradesco itself and companies from other sectors. Deloitte, for example, has recently moved into the space in search of innovations that can serve both the company itself and its clients. In return, it offers mentorships to its consultants in several areas.
The symbiosis logic also transforms the sector’s relationships. “We understand that organizations, even competitors, can come together to co-innovate and create solutions for the same market” says Fernando Freitas, executive in charge of Research and Innovation at Bradesco, which is ahead of InovaBRA. He mentions, for example, R3, a consortium that brings together several banks and is headquartered at InovaBRA Habitat. “Companies from different sectors can do the same, considering that they are relevant at different times of the same client’s journey” adds Freitas. “An example is LadyDriver, a transportation application that also has an office at Habitat and has recently closed a partnership to offer discounts to clients of Next, our digital bank.”
Transformation is the ecosystem
The Brazilian banking sector is well known throughout the world. In 2017, banks allocated R$ 19.5 billion to investments and technology spending in the Country – 5% more than in the previous year, according to “Febraban Banking Technology Survey 2018”. According to Gartner data, in 2017, banks shared with the Government the top of the list of sectors with the highest technology expenditures in Brazil – each with 15% of the total. On the global average, the Government led the list with 16%, with banks following with 13%. Technologies, such as artificial intelligence, cognitive computing, analytics, blockchain and Internet of Things are already very much present on the radar of financial institutions.
With such firepower, a fair question to ask is: why do banks choose to foster the innovation ecosystem rather than to embark on an acquisition journey? “The acquisition of a fintech, for example, does not guarantee that the innovation brought by it will have its full potential exploited”, says Biagini of Deloitte. “On the contrary, there is a risk that the structure of the purchasing company – larger, more complex and slower – will nullify the innovation culture and innovation itself.”
A portrait of the Brazilian banking sector
How the market is advancing regarding technology: investments, demands and transformations
Banks have allocated R$ 19.5 billion to investments and technology spending in Brazil in 2017 – 5% more than in 2016. The Febraban Banking Technology Survey 2018 showed significant increases in the specific share of investments (13% in 2017, to R$ 6 billion) and in software spending (17%, to R$ 9.8 billion). These are correlating trends in an effort to support the development of solutions and services and to bring better experiences and more quality to consumers.
Previous operations on physical channels are already beginning to migrate to the digital environment: the volume of transactions with financial movements made via mobile banking grew 70% in 2017, to 1.7 billion transactions.
The preference for the mobile appears even in activities that are more complex: in the same period, through this channel, consumer credit grew 141%, investment operations or applications, 42%, and the number of requests for credit cards, 53%.
To continue to pave the way, banks are already paying close attention to new technologies. Analytics, cognitive computing and artificial intelligence are already part of the investments of 80% of banks. With an eye on the evolution of the financial market, 75% invest in blockchain, while Internet of Things (IoT) catches the attention of 45%. NFC, a mobile payment technology, is on the agenda of 55% of the institutions.