TFT sat down with SEI’s Head of Global Solutions for Private Banking Rob Wrzesniewski, to discuss what he’s seeing in regards to the partnerships being formed between the large financial services incumbents and newer, more agile fintech start and scale ups in the space.
TFT: Tell us about the interaction you’re seeing between the large FS institutions and fintechs.
Rob: Contextually, I’m defining “large financial institutions” by traditional financial services or wealth managers. We’ve recently been seeing different models at larger firms that are inclusive of either renting or partnering with capabilities from fintech firms. Look at where we are now with the advent of APIs vs. where we were a few years ago. What we’re able to do with data today is a very attractive option for financial services companies who are looking to fill potential gaps in their product or platform line-ups. There’s opportunity to get creative and move fast by partnering with outside firms.
Importantly, partnering with fintechs allows financial services firms to take a core satellite approach, which is typically an investment portfolio term, to build out platforms. From a technology standpoint, a core satellite approach allows financial services firms to stay focused on their core capabilities while using outside partners to fill in from the outside. It’s a very attractive model for both sides of that transaction.
TFT: Is there a pattern of big institutions buying early stage competitors to ensure the IP isn’t put to use in a way that could disrupt them?
Rob: We do see a pattern but attribute it to other factors. For a financial services company looking to bring best-in-breed capabilities to clients, we don’t think it’s a fear-driven decision. We’re now in a space where there’s plenty of opportunities to meet and perform due diligence on fintech providers, assess how they could complement existing technologies, and rather than replace the existing functionality with the fintech’s capability, use it to supplement the client experience.
“There’s opportunity to get creative and move fast by partnering with outside firms.”
Replacing legacy technology with a fintech module isn’t necessarily done out of fear of disruption as much as it’s done to stay abreast of the most recent technology trends. In some cases, the best way to do that is partner with a firm that’s focused on a specific component of the investor value chain. They come to work every day committed to being the best in their space, and financial service firms would be smart to leverage that focus.
TFT: Are smaller start-ups able to conduct innovation more efficiently than larger institutions?
Rob: A smaller start-up that doesn’t have 15 or 25 years’ worth of legacy technology to consider can certainly hit the ground running faster than a larger institution that has to be mindful of an entire technology ecosystem. A start-up’s ability to focus on removing friction from a problematic workflow or enhance a dry client experience is powerful – but not unique. The ability to focus and iterate enables a startup to potentially move faster than a firm that’s got to worry about how to build while integrating functionality within legacy technology.
In some cases, we see new, smaller scale firms that innovate faster. In others, we’re increasingly seeing large financial services institutions recognize the value in the approach – evidenced by what’s happening with robo advisors. Larger, established firms are able to throw a lot more resources at tech innovation and tie it directly to an already established distribution channel.
“Replacing legacy technology with a fintech module isn’t necessarily done out of fear of disruption as much as it’s done to stay abreast of the most recent technology trends.”
We’ve seen those types of capabilities come to market, if not first to market then shortly thereafter. This approach isn’t just limited to small start-ups, as there are obvious benefits to having deep pockets and established technical talent to throw at solving the very same problems.
TFT: Are institutions cutting ties or shutting down the fintech parts of their businesses too quickly when things aren’t going as planned?
Rob: Not in our experience. Established financial services firms have the balance sheet and infrastructure, giving them the patience to take a longer-term view and eliminating worry about securing investment funding or integrating technology with a distribution partner to source products and services.
Financial services companies can let initiatives play out at their own pace and be patient with innovative ideas and approaches. That’s certainly a strength of ours, as we can look at the big picture and take a long-term view on success. A new start-up can feel pressure to get an MVP developed, tested and out to market in order to show viability.
TFT: What are your views on the increasing investment by PE into UK fintech despite recent M&A figures being down?
Rob: It’s not surprising if you look at the intersection of a couple of technology and financial trends. Specifically, the UK alone will see a wealth transfer exceeding £5 trillion over the next 30 years. Couple this with UK consumers’ fintech adoption rate of over 70%, and we see a huge opportunity deserving of the recent PE investment. It’s a really attractive growth space. Even with overall M&A figures being down, great opportunity exists due to this phenomenon. M&A firms can not only participate in the generational wealth transfer, but also experience growth powered by Gen X, Gen Y and millennial inheritors who have driven those high fintech adoption rates.
“we can look at the big picture and take a long-term view on success.”
From payments to insurance to planning, the next generation is almost demanding that they’re able to access and interact with their wealth in non-traditional ways. Looking at what technology has done in the transportation and entertainment industries, it’s not surprising those same behaviors are bleeding into financial services and creating opportunities for fintechs. PE is definitely moving into where this demand lives and the assets are going.
TFT: What big successes have we seen, and conversely which big failures?
Rob: Even traditional financial services firms have become very aggressive about removing friction from every part of the client journey. If you look at how the industry has had to react to specific robo account-opening experiences, consumer expectations have changed forever. This can be seen as both a success for investors and a failure for traditional providers to drive innovation without outside disruption. Either way, it was an eye-opening shift for the entire industry. Going forward, we think this has changed the dynamic for good, and traditional financial services and fintech firms will continue to partner to deliver exciting capabilities to investors in the future.