It innovation is currently having one of its golden ages. Many technologies such as Blockchain, AI, Data Analytics, Robotics, OCR, etc., made significant progress in the last 2 to 5 years, triggering interest in the banking community to try to apply these technologies individually or in a combined manner in business activities. The trade finance world, with all the paper-based and manual processes, is a suitable area to leverage these new technologies in order to offer better user experiences, significantly improve the efficiency of operational processes, and be more agile in bringing new products to the market.
My personal innovation journey started almost four years ago with Blockchain. That period of time was probably the “peak of inflated expectation” as described in the Gartner’s Hype cycle: no business problem would survive the new technology onslaught and the disintermediation threat aimed at the banks had never been so high. Since then, banks have frenetically gone into internal or external Proofs of Concept (POC). Some banks chose to become partners with Fintech companies, as they assessed the relevance of the technology in a wide range of use cases to build hands-on expertise and to use innovation as a communications tool. Several banking groups went as far as investing directly into Fintech companies to support their strategies.
Now, while some significant achievements have been reached, the market has started to realize that the Blockchain journey will be longer than expected. Still, the accumulated experience through try-outs, successes, set-backs and challenges in implementing Blockchain solutions allows the industry to approach the topic with a more level head and focus on what is fully aligned with their strategy. Here are a few lessons that I learned in driving innovation projects within BNP Paribas.
From competitors to partners
Ten years ago, the general approach for big banking groups was to differentiate themselves through proprietary platforms, and Fintechs were seen more as competitors. The new innovation hype and the rise of Fintech firms was presented as a disruption threat for the incumbents and a risk of disintermediation. While there has been Fintech success, notably in payments, the paradigm between Banks and Fintechs has changed over the last years with more collaboration and partnerships, leveraging the openness and nimbleness of the Fintechs with the balance sheet and industrial control framework of the Banks. Our own Connexis Supply Chain platform is a very good illustration of that change of mindset: initially designed as a one-stop shop for all supply chain management and financing, it is now integrated with Tungsten, a very successful Procure-To-Pay platform. The Banks’ challenges nowadays are to navigate the entire Fintech ecosystem and to make the right connections with the right depth while keeping watch on other promising technologies/Fintechs. Banks want to engage closely with the solution providers that are aligned with their strategy, but also keep some arm’s length in this volatile market, which can turn in a different direction during the next five years.
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A balanced governance is key to delivering value
Innovation in a large banking group faces a set of challenges: a vast and diverse stakeholders group, a highly regulated environment, non-open legacy systems, a conservative mindset – the list goes on. To maximize the chances of success of an innovative initiative in such an environment, there is a fine balance to be found in terms of governance between:
• The impulsion from the strategic vision; the enthusiasm the “dreamers” must generate; the leadership from senior management to sponsor the project; the ambitions that are set and communicated upon versus the most likely phased execution journey of that strategy; the realism of the actual action plan and the inherent risks of delay when discovering an unexplored expertise area. While both sides need to be coordinated and will cross fertilize each other, let the strategists lead the strategy and let the “doers” execute.
• Making sure that every stakeholder is heard, updated, and part of the decision process versus empowering small groups of subject matter experts to work efficiently and deliver solutions quickly.
• Our ability to influence and be a part of innovation by engaging actively and/or financially with Fintechs versus retaining the ability to disengage or adapt if the context or the strategy changes.
• The “cool factor” of implementing new technology and the “think out of the box” mindset versus the well-established controls and procedures.
• New comers with a fresh look at a given area versus subject matter experts.
POC is easy, going to production in an industrial fashion is the real difficulty
Delivering a POC is already a significant achievement in itself. The team needs to identify a viable use case and then put in place the functional and technical action plan to deliver the solution. In parallel, the business needs to understand the concept and the benefits as well as engage with customers willing to be pilots. All internal approvals must be reached and the Legal documentation must be signed.
However, bringing that POC to an actual enterprise production ready status shouldn’t be underestimated. First, the weight of the existing procedural and control framework may hinder the momentum of the initiative and end up stalling the project. To address this challenge, our innovation teams set up a much appreciated ideation process to support the initiative sponsors.
Second, integrating a Fintech solution with the Bank’s legacy system(s) to make the solution scalable and replicable is also a significant endeavor, especially when a potentially large geographical or legal entity scope is taken into consideration. I feel it’s especially true for Blockchain solutions in the banking world. These solutions tend to focus on Front Office features and most (if not all) POCs seen in this area so far relied on a manual intervention of the operational teams to bridge the Blockchain solution and the actual back-end processing. While starting manual without system integration can be relevant to accelerate the time-to-market, a vision of the industrial solution should be factored in early on to manage expectations and ensure scalability.
The banking industry is still in a prospective mode in regards to the Blockchain technology. Some convincing solutions are emerging, such as the R3 Marco Polo project in the Supply Chain finance space, and they are all facing the challenge of building a network of stakeholders large enough for the solution to become self-sustainable. Looking into my crystal ball, we won’t assist to one single standard overtaking the entire market, like the Blu-ray standard did over its HD DVD competitor. On the contrary, many standards and networks will probably emerge, which makes the interoperability of this various technologies a key topic in a foreseeable future. I believe that the path for massive adoption of the Blockchain technology goes through a first step in which the Blockchain powered business networks are interfaced with the legacy back end systems of the banks. This phase would allow the banks to get a deep and practical grasp on the technology’s advantages or limitations and to prepare the legacy systems upgrade or replacement accordingly.