FinTech Engagement with Investment Managers: Engagement Best Practice

**Section 4**

The Sales Process

Engagement with investment / wealth management firms is often complex and lengthy. Understanding the requirements of each stage is crucial for FinTechs and should commence only if you have a defined solution with a clear understanding of the various stakeholders, the decision makers but as importantly the influencers and users. By demonstrating detailed understanding of the specific problem and overcoming often deep routed concerns and objections is vital in order to progress to the contract stages. The contractual and legal elements are often detailed and protracted, for that reason it is important that the expectations of both parties are managed to safeguard the business case and successful implementation.

Source: Alpha FMC 2020

Common Challenges & Mitigating Factors

We have already identified that most FinTech collaborations are likely to have some challenges. Every partnership must be considered on a case-by-case basis. It is however vital that any new partnership is founded on clearly defined objectives or goals, is supportive of innovation and has agility on both sides to handle the problems and risks.

The following points may help FinTech firms to work more productively when partnering with traditional financial services firms.

1. Honesty: Total transparency as to whether the FinTech's solution is ready to use, in-development or simply in explorative phase. If you commit to deliver a solution be clear as to what you have available today. Plenty of firms are willing to partner with FinTechs to help develop a product, but over promising and under delivering will start the collaboration off on the wrong foot.

2. Common objectives and vision: Alignment on what should be achieved within the partnership is the key element that needs to be discussed very openly and honestly at the beginning of the interaction between the FinTech and the Financial Services Institution. Only if the success criteria match for both parties a joint implementation is feasible. The success criteria must be agreed by both parties for an effective collaboration.

3. Emphasis on agility: Although the business sponsor may aim to embrace innovation, FinTechs might face resistance from incumbents. Therefore, FinTechs should periodically ensure that they adjust their digital engagement methods to engage their partner.

4. Cultural merging: FinTechs and their partners should invest time to develop a sustainable working culture and work hard to adjust as the relationship evolves.

5. Sponsor involvement: FinTech firms need to keep the support of the sponsor, therefore regular and timely interactions are vital with senior sponsors; they should also take time to build relationships with any influential stakeholders who can ensure the wider firm supports the partnership.

6. Deliver innovation: FinTechs must ensure that the innovation promised is delivered, and the process is continuous, anticipating customers need beforehand, this may require constant investment.

7. Scaling the innovation: There will be procedural, compliance and technological obstacles during the proof of concept or pilot phase. Pre-empting these will help to quickly scale the solution. Open architectures and time understanding large corporate production acceptance, information security and support processes is vital.

Key Takeaways:

1. “Communication, communication, communication” - use to manage expectations, align on shared objectives, overcome cultural differences and build trust as an integrated team

2. Build industry knowledge to proactively anticipate requirements

3. Recognise that regulated institutions (and their partners) must demonstrate rigour in standards for implementations, risk management, scale and security - these are not “nice to haves”.

8. Governance and management: Often one of the last things FinTechs consider is how the control and management framework they have in place will be viewed by a partner, having the right policies and procedures will ease the partnership and ensure scaling of innovation is faster and less problematic with traditional partner.

9. Regulatory compliance: Since the financial crisis of the late 2000’s, regulation has become a constant area of change that large financial services businesses must build capability to cope with. FinTechs are no different and often these changes bring innovation opportunities.

10. Risk management framework: FinTechs must be highly vigilant, especially if they are given access to their collaborator's intellectual property and most precious, customer data. Algorithmic bias, risks and business resiliency also must be thoroughly tested. Be prepared to sign a mutual NDA early and understand the implications of non-compliance.

Key Challenge: Data Security & Ownership

Often the area of the most significant innovation for FinTechs is unlocking value in data or the ability to manipulate, visualise or represent data in previously unachievable ways. FinTechs that are able to generate insights from the enormous amount of untapped data in financial services can monetise opportunities. Capitalising on these opportunities requires far more than algorithms, cloud technologies and associated processing power. It is also vital that FinTechs can cope with the limits of reluctance to leverage cloud service for fear of data loss, data sharing protocols, data transport route limitations and concerns of long-term data sovereignty.

To overcome these issues, focus on both security and data management are of paramount importance for new entrants in the FinTech sector. Regulation in European markets is constantly evolving, Payment Services Directive (PSD2), General Data Protection Regulation (GDPR) have had a significant impact and the emergence of Open Finance is introducing new challenges as well as opportunities. Country or market specific regulation also amplifies the effort a FinTech needs to invest to understand the differences in processing, storage, retention and transportation of data.

It is not just the data that regulation can affect for a FinTech, intellectual property is also a key area of concern. Often taking an innovative approach to problems that large incumbents have struggled with because of their legacy approach, data capabilities or technology has been a catalyst for the creation of FinTech software or technologies. This approach is therefore highly replicable once understood. Another example is where FinTech’s products or services require a "network effects" to scale, the safeguarding of intellectual property rights is critical for sustainability but done in the wrong way can prevent either the innovative approach being monetised or the network effect from occurring.

As an early stage FinTech, it can often be helpful to leverage venture capital partnerships to offer a way to connect with incumbent Wealth and Investment Managers via participation in research assignments or executive briefings. These are of significant interest to incumbents as they provide insight and access to nascent technologies and how to apply them. However, it is important to understand the portfolio of the venture capital firm, review its experience in the sector/focus area of the FinTech, previous investment success rate and the partner that will be joining the board.

Patent management and intellectual property management of technology and data innovation is becoming ever harder with regard to entering new markets, jurisdictions and in contractual negotiations with corporate partners.

In the run up to 2018 the FinTech market was a focus of corporate M&A as companies considered it more effective to buy in technology and skills through acquisition of a FinTech to fast track the much needed disruptive scale their strategies were demanding; for many FinTechs, this was an excellent option but by 2020 commercial collaborations were increasing as a popular route to achieving these goals and should be considered equally valuable and viable for a FinTech.

Key Takeaways:

1. Data and its adequate protection are critical to future business models, market innovation and new customer propositions so must be a part of any strategic relationship and negotiation between FinTechs and financial services institutions

2. Collaboration, M&A, corporate venturing or technology acquisition models all require clear, upfront intellectual property protections for all parties.

Best Practice For Investment Managers Engaging Responsibly With FinTechs

Investment and Wealth Managers recognise the step change innovation benefit that Big tech or FinTech can bring to their organisation, or even to the market in which they operate. In recent years there was a rush to partner with Big tech or FinTech to speed up the innovation cycle. There have been many examples of both failure and successes. For anyone wishing to enter into a sustainable collaboration with a FinTech, the points on the next page are informed by the successes and pitfalls of the advisor panel’s previous engagements.

1. Align and manage expectations: Define the scope and the desired outcome of the collaboration upfront and do regular pulse checks during the engagement/collaboration. Be honest if expectations about the outcome differ.

2. Executive sponsorship: While technology integration can be cumbersome and need to overcome resistance within internal tech departments, the more crucial success factor is business adoption and leadership. A senior business executive as sponsor of the partnership is paramount, the co-sponsorship from technology helps smooth the implementation.

3. SPOC within the organisation: While FinTechs are lean, most Investment & Wealth Managers are complex in their org-structure. Providing a Single Point Of Contact (SPOC) with enough seniority to bring the relevant parties (e.g. InfoSec, Data Protection, Risk, Procurement) to the table will ease the interaction between FinTech and Investment Manager. Need to identify the right stakeholders with the AM org. Ensure C-suite sponsorship but importantly, include the buy-in for the primary use case by an analyst / PM who can help drive implementation as it is their problem being solved.

4. Pre-work: Projects within Investment & Wealth Managers usually come with some bureaucracy and approvals. Do these prior to the start of collaborating with the FinTech so that day one of the partnership is already a productive day. Think about a co-location to mix teams and benefit from the typically higher agility and speed requirements of FinTech work.

5. Proof of Concepts (POCs) should be thought of as Proof of Value (POVs): These should be treated and remunerated as applicable, covering costs and materials as a minimum. Clear communication of the problem together with agreed success criteria is important to demonstrate tangible value. Have a clear quantifiable cost/benefit analysis. 'What does it give me that we don't have today' (cheaper, smarter, faster)?

6. Adopt working style: Ring-fence the working environment where FinTech and Investment / Wealth Manager co-operate and select working colleagues who are capable of adapting their working style to an agile, output oriented, fail fast model. Don't try to carry the "normal" working culture into the collaboration. Over time, open the environment and let the agility spill over and become a natural working style within the Investment Manager. The problem-solving collaboration with FinTechs will help Investment / Wealth Managers to accelerate the required adoption of an agile working style.

7. Be a reference: FinTechs need reliable references to scale and scaling will usually help all clients of a FinTech. Be open to speak about your successful collaboration with the FinTech on events, conferences etc.

Conclusion

It is evident that over the last two years that as a sector we have gained a greater general understanding of technologies available, although their true potential has yet to be fully understood or exploited. What is clear is that identification of the problem statement is fundamental to gaining internal support and sponsorship in order to truly drive tech adoption.

Investment and Wealth Management is a complex landscape with numerous challenges affecting traditional business models such as data ownership & management, legacy infrastructure and existing outsourcing agreements with organisational culture, clear identification of the business need and appetite key requirements for supporting change and innovation.

It is unmistakable that COVID-19 has accelerated digital transformation in the financial services industry but FinTech adoption within Investment and Wealth Management is still lagging significantly behind other financial service organisations. Collaboration and communication between the parties is imperative to establish specific success criteria and expectations whilst providing rigorous standards in terms of data, risk, scale and security.

By identifying key requirements and considerations up front both the Investment Manager and the FinTech have the opportunity to engage in more productive and effective relations fostering strong partnerships. See attached checklists in Appendix 1.

List of Contributors