Is a hybrid trad bank-fintech bank the way forward?

The bank strips down, buffs up, gets a new wardrobe and fights again

British Rail sandwiches. Proof that doing something appallingly badly won’t stop a regulator from banning anyone else from trying to do it better.

I discussed whether banks know if they’re good at anything in a previous post, where I floated the unpopular idea that perhaps banks should actively look for things they do very badly and stop doing them. Perhaps they could get other companies to take them on. Or abandon doing certain things altogether.

I’m reminded of Vodafone mPay back in 2002. The startup I worked for invested significant developer resources in building an mPay integration so that Vodafone could take payments for use of our state-of-the-art mobile train info service. Sure, it was a clunky WAP service, but I like to think that a few hardy passengers appreciated an extra pint in the Railway Tavern knowing the 18:10 was cancelled. Of course Vodafone’s hopeless mPay technology was neither promoted effectively to developers nor its benefits sold to customers and it was a train-wreck. After six months we got our rev-share: a cheque for 26p, with an ironic 26p first class stamp on the envelope. Lesson learned - stick to what you're good at, if anything.

Suppose then that your enlightened bank management has furiously outsourced or simply abandoned all the processes that are irretrievably awful. At least, everything it’s allowed to by the regulator.

Regulation is the banks’ friend. Those comforting high walls that surround the core and justify the sinecure of thousands of grey men whose compliance function demands, with heavy regret, a rejection of every conceivable change, for the better or worse, that an imagined regulator might wish to scrutinise. Whatever else, the bank gets to keep doing the things the regulator demands. Still it would be nice if even those regulated processes could be subject to the “are we actually any good at this?” test, but let’s stick to what’s possible.

The bank now stands naked, a vertically-arranged set of limber processes, shaved of unsightly blemishes, exfoliated and buffed shiny, wrapped in a fluffy best-of-class towel of outsourced services. Solidly planted on regulatory feet, with a core that’s been strengthened by new hardware and crunches. Sarah Connor transformed from ditzy room-mate to ruthless operator.

In PSD2 parlance, our new-look ASPSP (the regulated bank) provides a few customer facing services on its own - just the things we’re good at, like consumer finance and reverse factoring: remember, we got rid of everything else.

Now we can confidently add on some new third party services, so we can serve more customers with some new product. In this brave new world, even though we’re pretty good at making product, we can’t do it fast enough, and anyway there’s a massive fintech ecosystem in which one of them is bound to be doing it better. These fintechs churn out services (as TPPs - third party providers) that actively seek ASPSPs to provide the enabling banking services. The TPPs don’t need to be banks because PSD2 allows them to innovate on top of the APIs we’re obliged to provide them. Our bank is delighted by this because our APIs are the best (if they weren’t we’d have got rid of them, right? see above).

So here’s the dream architecture: your traditional bank buffed up like Sarah Connor, armed to the hilt with a massive balance sheet and protected by all those regulatory walls, now hooked up to a band of young warrior TPPs who aren’t afraid to go out hard and break stuff to open up new markets. We have the things that our home-grown Sarah is good at (heavy gunfire, strong leadership, balance sheet etc), and a host of somewhat disposable new recruits serving other niches.

That all gives you a broad range of product in existing markets. But how do you expand your geographic reach? This is where partnering with another ASPSP comes in - and so much the better if that ASPSP operates as BaaS. Fortunate then that where I work has an investment in solarisBank, the fabulous German BaaS provider.

All together now: "... I need your clothes, boots and your motorcycle ..."

Naturally opinions are my own, and I don't pretend to represent the views of my employer.

Next time ...  Identifying the people who ‘get it’ is much more important than their status, seniority or position of influence