Collaborative partnerships between fintech companies and institutional investors have become more prevalent and mutually beneficial in the past five years, experts say, but both sides need to enter the relationship willing to evolve their own ways of working.
Geoff Hodge, chairman of investment automation software solutions company Milestone Group, said the somewhat destructive connotations of disruption are an extreme characterisation of what takes place with technology companies, and terms like “innovation” and “acceleration” are more fitting.
“Acceleration has been one of the traditional roles of technology companies, where you are looking to help financial services organisations get to where they want to go quicker [where they] take on a lot of the R&D risk and effort and then offer solutions that don’t require a development journey,” Hodge said.
Speaking at Investment Magazine’s Investment Operations Conference in late March, Hodge said technology companies that are very clear about what they set out to achieve and draw a boundary around what they want to be as an organisation can help ease client suspicions about startups setting out to “eat their lunch” or “steal their IP”.
A helpful lens for asset owners considering forming a relationship is to consider the technology company’s intent.
“If the intent of that fintech is to do something very disruptive, then you can forecast that that will become problematic in the relationship later on,” Hodge said.
“If the intent of that fintech is that they want to be part of change that’s going on in the industry in terms of the drive for efficiency, better customer outcomes and so on, then I think that’s a much easier thing to make gel and have longevity.”
But the procurement departments of large firms need to ensure their processes aren’t too rigid to block the potential value a technology company can bring to the table.
“I would say today the pendulum is very much on the applied traditional procurement approach,” Hodge said.
“Run an RFP, tick functionality boxes, and potentially miss some of the value that a fintech can bring.”
Firms should be willing to engage in dialogue with technology companies if they don’t earn a “perfect score” in the due diligence process, he said.
“Largely the category of fintechs I was talking about…are problem solving organisms, they want to get in and help solve problems,” Hodge said. “If you go through a technology selection process then you are not likely to get all of their input and creativity around solving a problem.”
Noam Tasch, Co-head of Digital Partnerships at American investment banking services company BNY Mellon, estimated his team meets with more than 300 fintech startups each year.
While the startup world can conjure up evocative ideas of hustling and disrupting, he says his team’s goal is simply to find financial services providers that deliver on a value proposition using technology.
“The bottom line is that when we are entering into these engagements with fintechs of every size, we have a really strong discipline,” Tasch said. “What’s the value we are driving, what’s the business reason for engaging in this relationship?”
Asset owners concerned about the risks of engaging with fintechs need to not only have a strong due diligence process, but also be ready to collaborate and engage, and willing to change their own ways of doing things if necessary, he said.
“I think it’s really important to really be hands on, it’s not an engagement where you make the hire and you walk away,” Tasch said. “It’s certainly an engagement where you are collaborating, where you are working with each other every step along the way. I’ll even say that there’s an element of adapting the way that you work and learning through those experiences. Many of the fintechs…are working in very agile formats, and if we don’t adapt the way we are expecting to receive those updates, that service, the new versions of software, it can really handcuff them.”