When the first wave of fintechs launched in the late 2000s and early 2010s, they made no bones about being in direct competition with traditional financial services firms.
From the terms they used to describe themselves — challengers, or disruptors — to how they marketed their products, fintechs highlighted at every possible opportunity that they were more customer-centric, more agile, and, well, just better than incumbents.
Then, in the mid-2010s, something happened. Fintechs and traditional firms realised they could achieve bigger and better things if they worked together instead of trying to out-compete each other.
But despite widespread agreement that technology is fundamental to the industry’s future success, asset managers still lag behind other sectors when it comes to collaborating with fintechs.
So what’s standing in the way of greater collaboration?
And how can asset managers ensure any partnerships they enter are as fruitful as possible?
Fintech and asset management: the current state of play
In 2021, 95% of asset management executives thought their firm’s digital capabilities would be a critical competitive differentiator by 2025. But most firms are still struggling to enhance these capabilities.
Case in point, only 8% of asset managers have fully migrated to the cloud. And while 74% are planning an AI strategy, only 26% have fully developed their capabilities.
The Investment Association — which Fundipedia has partnered with to develop a real-time data management service for asset managers — have identified five key obstacles to further progress:
- Establishing credibility
- Data ownership and management issues
- Legacy technology
- Outsourcing
- Culture
1. Finding the right fit
Does the technology address the asset management firm’s specific problem?
And, more importantly, does it have a proven track-record of success?
While these might seem like obvious prerequisites for a fruitful relationship, they aren’t a given.
In an increasingly saturated market, it’s becoming difficult to discern at which stage of development a technology platform is, let alone if it’s fit for purpose. And this lack of transparency is undermining credibility and generating mistrust.
As Deloitte bluntly put it: ‘The market is jaded a bit now by all the hype surrounding fintech.’
2. Who owns the data?
Asset management firms are drowning in data. But data scientists spend 80% of their time making it fit for analysis, instead of actually putting it to work.
Cloud-based, AI-powered data management platforms can unlock significant value by putting this tedious, time-consuming work on autopilot, breaking down silos, and making data more accessible across the entire organisation.
But while most firms are well aware of this potential, the Investment Association notes there’s still some reluctance to fully embrace these technologies, due to fears it entails giving up data ownership and putting its security and integrity at risk.
3. Overcoming legacy
According to the Alternative Investment Management Association, 80% of asset managers’ technology budgets go towards maintaining, repairing, and updating old legacy technology systems.
Needless to say, while patching existing technology is cheaper in the short-term, it creates a vicious cycle. The longer firms postpone switching to new technologies, the more expensive and technically demanding digital transformation becomes.
4. Outsourcing arrangements
Like firms in most other industries, fintechs increasingly rely on freelancers and third-party service providers to operate efficiently and cost-effectively. In the UK alone, there are over 2 million freelancers, and 39% work in tech.
There’s nothing inherently wrong with using external resources to augment in-house teams. That said, working with fintechs that outsource a significant portion of their development to third-parties may have far-reaching implications for asset managers.
As from 31 March 2022, PRA-supervised investment firms will have to follow new guidelines on third-party outsourcing and risk management. Ensuring subcontractors are compliant with these rules adds a further layer of complexity to arrangements with fintech partners.
Even for firms that are out of the PRA guidelines’ scope, holding subcontractors to the same standards as in-house staff can be a challenge.
5. When cultures clash
Moving fast is part of fintech firms’ DNA. Most product launches are relatively quick — time from development to market is typically measured in weeks or months, not years — with iterations and improvements coming later.
This is worlds apart from how things are done in traditional asset management firms. Where fintechs are agile, flexible, and willing to take chances, even if, to paraphrase Mark Zuckerberg, this might break things, asset managers often have stringent processes and a low risk tolerance.
Bridging the gap: 7 best practices for more productive asset manager-fintech relationships
Surmounting the obstacles standing in the way of closer cooperation between asset managers and fintechs requires give and take on both sides.
Here are seven best practices that can help build trust, bridge the cultural gap, and foster sustainable, long-term partnerships.
1. Set expectations up front
Partnerships between asset managers and fintechs can only be mutually beneficial if both sides are on the same page about what the arrangement should look like and the end goal.
What’s the scope of the collaboration? How will it work? And what does each party want to get out of it?
The Investment Association recommends radical honesty from the get go, including about whether the technology is ready to use or still being developed.
‘If you commit to deliver a solution, be clear as to what you have available today. Plenty of firms are willing to partner with FinTechs to help develop a product, but overpromising and underdelivering will start the collaboration off on the wrong foot.’
It’s also important to have regular catch-ups, so you can evaluate progress and iron out any issues as they arise.
2. Get stakeholder buy-in early on
While a digital transformation project’s success or failure only becomes apparent when the system is deployed, problems typically start much earlier.
For asset management firms’ staff, digital transformation is usually an extra item on their already jam-packed to-do lists. So, ‘unless people at all levels are convinced that change will be an improvement,’ says Santander CIB’s former head of internal control Gonzalo Hurtado, ‘a project is unlikely to succeed.’
This calls for strong leadership.
A senior executive must take ownership of the project, build a solid business case that overcomes any objections at senior management level, and have a team in place.
More to the point, end-users should be involved as early on as possible. Ultimately, they’re the ones who will be using the platform on a day to day basis.
3. Have a single point of contact
Aside from building the business case, tackling objections, and leading the project, having one person take ownership of the project is important for another reason.
Asset managers’ complex, siloed hierarchical structures can create approval bottlenecks. If that happens, having a single point of contact can help move things along.
Ideally, the person in charge should have enough seniority to bring everyone involved in the project together and make the final decision. This avoids unnecessary back and forth and keeps the project on track.
4. Sort out vendor onboarding ahead of time
Any partnership with a regulated firm inevitably entails bureaucracy — due diligence, security assessments, non-disclosure agreements, policies, and endless other paperwork.
The process can take several months to sort out, which is endlessly frustrating and risks derailing even the most conservative delivery schedules.
With that in mind, it’s a good idea to talk fintech partners through the requirements and get things moving well ahead of time, so the collaboration can be productive from the first day.
It’s also important to check whether any policies, particularly data ownership policies, need to be amended to suit the relationship.
5. Start with proof of value
Showing that an idea can and will work in practice is, of course, fundamental. But showing how it will add tangible value to the organisation in the long-term is more useful.
Proof of value crystallises the business case for the project, which can help overcome lingering resistance and make implementation smoother.
Crucially, it creates a benchmark against which you can measure success.
6. Create a sandbox environment
Ring-fencing the project environment helps the teams involved adapt more easily to working together.
This is especially important for asset management firms’ staff, who may not be used to the agile methodology. A safe space gives them the confidence to experiment without worrying about the consequences of failure.
Over time, the shift in mentality will permeate the rest of the organisation and facilitate faster, more iterative, digital-first processes.
7. Champion each other
70% of value-creation in tech is due to network effects. But these can only come into play if fintechs manage to scale.
For this reason, the Investment Association advocates for asset managers to be open about successful collaborations with fintechs. By providing social proof and evidence of a track record, they enable fintechs to improve on their technologies in ways that benefit everyone.
In tech, collaboration is greater than competition
Far from being at odds, fintechs and asset managers can benefit greatly from working together.
Fintechs stand to gain industry knowledge and greater credibility. In return, asset managers can learn how to be more nimble, adaptable, and digital first.
But if both sides are stronger when they work together because of — not in spite of — their differences, they can only succeed if they recognise these differences in the first place.
For collaboration to be fruitful, they must meet each other halfway, put the right working environment in place, and make sure expectations and communication are crystal clear.
At Fundipedia, we’ve been partnering with asset managers to help them unlock the value in their data and future-proof their businesses since 2007.