Much has been written about FinTech in banking. However, the focus has been on functionality enablement and consumer experience, with little insight into what the limits of FinTech benefits might be (and how that would shape an implementation strategy) or how banks can enable a roadmap that drives process improvement. Here I address both of these questions.

What are the reasonable goals of FinTech enablement?

All financial institutions develop profitability from:

• Assets (owned, advised, or brokered) providing revenues
• Liabilities (owned, advised, or contingent) costing money
• Operations managing customers, assets, and liabilities.

FinTech offers the hope of improving:

• Asset and liability (A/L) quality assurance
• Customer, counterparty, and stakeholder relationship management
• Operations efficiency.

Each of these areas for improvement is a worthwhile goal, but not an unlimited pot of value. For example:

• Asset/liability QA: the main source of asset impairment is credit/investment policy. Improved A/L monitoring can produce a 5% to 10% improvement in loss reserves, which translates into 5-10 B.P. improvement in revenues
• Stakeholder relationship management: increases in C-SAT and other stakeholder experience can produce 10% to 30% revenue gains, but only if competitors are unable to copy those gains. Persistent C-SAT gains are derived from consistent positive experiences, which reduces long-term revenue gains to 100 B.P. or less
• Operations efficiency: improvements in operating efficiency due to technology often range from 5% to 20% (500 B.P. to 2000 B.P.), applicable to costs associated only with the direct range of process impacted. Sales customer contact typically represents 50% to 80% of a bank’s staff (70% being the average). Staff typically represents 50% of overall costs, and costs are 50% to 60% of revenues (the overall efficiency ratio). Thus a FinTech project impacting the entire sales/customer contact function might expect to deliver an impact on overall costs of 3% of revenue.

Thus, for a rough estimate of value, the benefits from FinTech projects can be projected to range from 5-10 B.P. of revenue (for quality assurance projects) to 300 B.P. of revenue (for sales/revenue generating projects). FinTech implementations and maintenance requiring a 10% increase in staffing costs would cost as much as the total benefits derived. However, the lower a bank’s efficiency ratio, the more likely any project would achieve a positive net benefit to the bank.

How can banks enable a roadmap for profitable FinTech implementation?

Standing up a solution development staff capable of creating a new platform roadmap and executing that plan is very expensive. Banks have been cutting internal IT staff for over a decade, and IT staff are challenged just to maintain legacy systems (which is the primary driver for SaaS). Without internal IT staff to create cost-effective FinTech capabilities, partnering is the only way to achieve success. Based on the above rough cost estimates, third-party provisioning of FinTech at a 20% lower cost than internal would only deliver a 20% profit margin on FinTech investments, or a 60 B.P. boost to the overall bottom line. That assumes no implementation risk and long-term persistence of competitive advantage. Most banks require a more robust business case to undertake a project.

In summary, to effectively undertake FinTech as a competitive differentiator, banks will need to:

• Partner with third-party services vendors who participate in implementation and business risk
• Select high-value projects of limited scope to build experience internally (in the LOB primarily) and with partners to validate business results and opportunities
• Monitor technology vendor development via the use of third-party services vendors and be prepared to switch vendors and solutions as the technology develops
• Focus internal efforts of traditional banking processes (e.g. credit/investment strategy). The effect of traditional processes are magnified by FinTech, and have a larger impact on profitability than FinTech.