How do big banks get the balance right when signing partnerships with RegTech startups?

As corporate investment partnerships gain popularity, it takes some understanding to get these partnerships right, according to a panel at the Global RegTech Summit 2019.

The game has changed. It used to be that entrepreneurs revelled in the idea that their startups were going to disrupt sectors, turn them around and take the incumbent major players down a notch or two. However, that is no longer the case. Instead of going toe to toe with the big guys, they are now entering partnerships with them. That’s also true for the RegTech sector. As the industry investments increased five-fold between 2014 and 2018, the number of partnerships has also grown.

But as these partnerships become more prominent, it has raised questions about what the best way to arrange them are, what big players look for, what role legacy systems play and what the most interesting RegTech areas are right now.

These were the issues a panel discussed at the Global RegTech Summit. The panel consisted of Mary Jane Ajodah, vice-president of strategy at the digital office at BNY Mellon Bank, Sarah Kenrick, senior risk innovation programme manager at Lloyds Banking Group, and Valerie Dessaignes, head of digital transformation at Société Générale Group, the bank.

The panel kicked off with Dessaignes arguing that the key areas for RegTech partnerships are compliance and know your customer (KYC) solutions. “We’re kind of saving banks from huge fines so compliance is extremely important,” she said. And the numbers back her up. Between 2014 and 2018, 34.5 per cent of the investments made in RegTech have been regarding KYC, representing roughly $3.42bn in total, according to RegTech Analyst’s own research.

Dessaignes added that as many banks can have up to 90 per cent false positives in transaction monitoring and filtering. “So that’s [how we can] make a dramatic difference with RegTech,” she continued.

Ajodah added that what she called “optical character recognition plus AI” was one of the most important fields for entrepreneurs and incumbent actors in this field. “There are machine learning capabilities out there when married with those CR that have potential to really accelerate and speed things up,” she said, arguing that this was an area where banks could certainly benefit from utilizing the outside competencies of startups.

Given the importance of these areas, it is understandable why many big institutions have ventured down the route of entering into partnerships with new enterprises. But that leaves the question of how incumbent players identify the right startups to team up with.

For BNY Mellon Bank, part of that answer is the implementation of Startgrid, a platform enabling organizations to find market-leading new enterprises and connecting them with internal teams to innovate at speed. “We actually use [it] very heavily to make sure that once a startup is identified or some external opportunity is identified, it’s visible to the relevant line of business leads,” Ajodah explained. Lloyds is also looking at implementing Startgrid or something similar in the future.

But let’s say there is a startup out there looking at the kind of solution a big company is considering. Does that mean it will automatically lead to a partnership? Not really. Quite often it becomes a question of either buying a solution or developing it in-house. Ajodah explained that this is an ongoing conversation at  BNY Mellon Bank. That is particularly in cases where the in-house team have the competencies required to create a similar solution. “It’s been a little bit easier with cases where the competency is so outside the realm of traditional banking that there’s been a little bit easier to make that,” she suggested. Ajodah added that the BNY Mellon Bank would be less inclined to let outsiders work on any of the bank’s core systems.

Similarly, Kenrick said Lloyds had begun to look for “opportunities that naturally complimented our business model and we set up what we refer to internally as our corporate bench panel.” This meant the bank could more easily reach out and sign partnerships with new players and then create ongoing conversations with them.

Another hurdle to overcome in order to create a successful partnership is speed. Ajodah said  BNY Mellon Bank had found that it is vital that things do not drag on and on after a potential partner had been identified. To make things faster once the bank had decided to procure a startup, it should move on it with some expediency. This means smoothing out the process as much as possible. “You need somebody within the organisation who’s championing you and making sure that process pushes forward and things aren’t coming up that are roadblocks that shouldn’t be roadblocks,” Ajodah said.

While many traditional institutions sign up partnerships in order to revitalize their offering, the systems implemented over time at those organizations can become a huge roadblock. “I would say the main constraint is implementing these systems with our legacy systems and that’s where we lose time is not signing on and launching it, making this work within our organisation with the IT limitations that we have,” said Dessaignes.

As Kenrick pointed out, the Bank of Scotland has a history spanning more than three centuries. “So naturally we have legacy systems, everybody does and when you have large organisations like we do, to modify them and change them is a big deal and I think you’ll see a lot of investment in that space,” she argued.

However, not every partnership is a match made in heaven. Sometimes things go wrong. Kenrick remembered one case when a vendor had shown its proof of concept, which wasn’t exactly what Lloyds was looking for. When that happened, Kenrick’s team tried to understand why the results were less than ideal. Was it because the startup had misunderstood the question or that Lloyds had been too undescriptive in its language? Importantly, she added that it’s not the end of the world, “Let’s not say yes or no or you’re in or you’re out, it’s not black and white.” Find the error, adjust and try again.

The panel was also asked if there were any ways in which the government could make it easier to innovate in the RegTech sector. Dessaignes answer she would love to see the government set up more sandboxes for the industry to try new things in, especially around financial crimes and KYC. She expanded by saying banks are currently in a “no-win situation on transaction monitoring.” “You have scenarios that you develop, you have a regulator that says okay to them but doesn’t validate them as such and if there is a crime committed that went through the scenarios, well you’re still responsible so I’d be very happy to have a set of scenarios provided by the regulators through RegTechs that we could use,” Dessaignes said.

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