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Giving innovation a boost
Giving innovation a boost
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Giving innovation a boost

13/02/2019

Established financial services firms and their clients can benefit hugely from joining forces with fintechs, as BNP Paribas Securities Services’ partnership with Fortia Financial Solutions has proved

Technology has always been an important part of the financial sector, but it has increasingly become a disruptive force, changing mainstream finance in radically transformative ways – a trend we’ve all come to know as ‘fintech’.

Last year saw a rise in incumbent financial firms allocating resources to research and development in fintech. Many such firms believe they risk getting left behind in the financial markets of the future if they do not explore this trend. Incumbents' investment into the sector has seen acquisitions of challenger start-ups as well as the in-house development of such firms.

Leading the way

BNP Paribas Securities Services has been at the forefront of these developments with its in-house fintech sandbox, launching its own start-ups or partnering with existing start-ups outside the firm. In 2017, the business took a minority stake in fintech start-up Fortia Financial Solutions, a software company that uses artificial intelligence, machine learning and business process monitoring to help the fund industry meet rising compliance requirements and manage volumes of data.

Jean Devambez, Chief Catalyst at BNP Paribas Securities Services' Digital Transformation Lab, is responsible for spotting and launching new in-house ideas that can be converted into startups. He also looks for opportunities to collaborate with existing start-ups to solve an in-house problem where the business does not have the requisite expertise, but has other resources to help the start-up scale up. To work successfully with existing startups, he says finding a good issue to solve is crucial because the effort involved in scaling up will be quite significant. “This was the case with Fortia,” he adds.

When BNP Paribas Securities Services took a minority stake in Fortia two years ago, the fintech firm had five staff members. They are now close to 70 employees, mainly because they had to scale up to enable BNP Paribas Securities Services to work with their platform. Devambez says:

“From a commercial standpoint, Fortia is successful because the product is good, but our name and brand in the partnership has also helped it grow. We bring this capacity to accelerate growth, and also the expertise.” BNP Paribas Securities Services also helped Fortia to deliver all the nonfunctional requirements that the bank requires, such as security and compliance to deliver the products to the industry at the required standard.

People and process

The most important element in partnerships with start-ups is people, says Devambez. “You need to have experts who you can trust because you don’t really have much more than that when you begin the project. With Fortia we were absolutely convinced by the product, but looking back at the effort they have made from where they were to where they are today, it is all about people and how they are able to attract additional talent and to manage them and to grow them.”

Another issue that a lot of big firms moving into fintech partnerships need to consider – an issue that venture capital firms, which have traditionally seeded such firms, understand well – is allowing room for failure. Some of the projects simply will not work or simply aren’t scalable. Devambez agrees that incumbents must be open to experimentation, and also, failure, even if only to a limited degree. His process uses a three-to-six month timeframe for ideas.

When working with a start-up, this phase will allow both partners to identify a use case, perform detailed assessments of the product and qualify its fit with the market (does it answer clients’ needs, for example) and the organisation. By the end of six months, incumbents are basically committed and often in the same boat as the startup. Also, by then, failure has too many consequences.

Dialogue is key

In collaborations between incumbents and start-ups, dialogue is key. Sira Ferradans, Chief Research Scientist at Fortia, says: “It is difficult for someone in tech to come up with solutions for a bank and vice versa. Things are not so obvious – especially technical terminology. You can decide what the final picture looks like together. It is a very creative process.”

Fortia definitely had the technological know-how at the start of the process, but Ferradans says it was eye-opening how some problems that are easy to solve for start-ups can be considerably larger for big firms. However, despite the complexity, Ferradans says “this relationship with a big company and a start-up entity that has a lot of experience in the domain can be very enriching”. While Fortia’s experience with BNP Paribas Securities Services was very positive, she can also see how start-ups can trip up and how incumbents can suffocate innovation instead of supporting it.

Ferradans’ advice to big companies is to really think about what start-ups need. She says: “I think the first thing is to have people prepared to work on a completely different philosophy and flexible protocols because big institutions can be bureaucratic and this could cause big problems [in conflicting working styles].”

In fact, she thinks both sides need to be really clear about their own needs and consider the needs of the other party and give them space to achieve putting those protocols in place.

What’s in it for clients?

In the end, it is clients and the industry that should benefit from these partnerships and their mutual learning. Devambez makes it clear that clients often ask for things they would like to see and use. He says: “Clients love that every time we present our approach to them, they can see we are investing in the future and bring them the possibility of new business through new services.”

Through better use of fintech, BNP Paribas Securities Services aims to address services not covered or well covered and increase the quality of end-to-end processing to deliver transparency and capacity and the ability to react more quickly to client needs. Efficient responses and faster access to information is a big plus as it ultimately improves the user experience. Data security is also ensured as the data used in the prospectus is publicly available and all the customer information stays inside the bank.

Overall, Ferradans sees the fintech sector developing positively as a result of these partnerships, as does Devambez. However, he cautions that incumbents need to distinguish between genuine structural innovation and marketing. The introduction of a fintech partnership should be done for a good commercial reason and not merely to seem ‘on trend’ with the rest of the market. “Having said that, I had a strong conviction, which is even stronger today, that it will remain difficult for banks to innovate 100% in-house for so many reasons. Sure, you can do a lot of things in-house, but for some cases it is very difficult.”

One obstacle to in-house innovation is the fact that incumbents are often under pressure to prioritise essential or compulsory projects, such as implementing regulatory change, dealing with platform obsolescence or driving through projects that achieve cost synergies.

There is still opportunity to collaborate if the partnership can’t be done in-house, by excavating some fintech startups and leveraging their capacity to achieve genuine structural innovation outside the company. “Again, that requires either collaborating with an existing start-up or creating and launching a new start-up,” says Devambez. The benefits of collaboration are worth the effort, he adds. “Working with a start-up helps to evolve an incumbent’s mindset, bring fresh and more daring ideas to the table and highlight areas – such as the decision-making process – where incumbents need to improve.”

Fintech’s potential in asset servicing and management

In asset servicing and management, the technologies that promise the most potential are artificial intelligence (AI), especially natural language processing (NLP). BNP Paribas Securities Services’ Jean Devambez says the intuition for this is obvious: “We are in an industry still using a lot of paper and manual processes. There are many areas where smart automation can deliver short-term benefit for quality, efficiency and cost.”

Boston Consulting Group’s 2016 report Fintech in Capital Markets: A Land of Opportunity found that asset managers and custodians have been slower than banks to adopt fintech. Fortia’s Sira

Ferradans thinks this might be because it is more difficult to automate an asset manager because many written and spoken texts and opinions are used in the industry. Meanwhile, the technology in more complex and creative natural language generation is not as advanced as natural language understanding.

Ferradans predicts more activity in applications of text generation, which will help asset managers and custodians get into the deep learning wave and machine learning wave. Major trends will continue to be companies trying to find applications for machine learning in the financial domain, for example, with robo advisers and aspects of NLP not completely exploited.

Fortia uses AI and machine learning to manage compliance, data, risk and depositary reporting and is also working with several financial institutions to automate their data management processes. Generation and analysis of compliance documents can be very time-consuming and involve many different departments and people and validation of information already in a database, but without a common platform on which participants can actively collaborate. Many internal databases of banks’ information can also have errors or be out of date.

What Fortia is proposing means the prospectuses can automatically be validated and based on texts already approved by lawyers, making it much faster to read. The technology uses classic machine learning to classify sentences by highlighting and extracting regulatory rules from prospectuses for every sentence in the document.

These applications also work for custodianship because the rules mandated by the asset manager in the prospectus need to be constantly validated against the portfolio. When the machines check the rules using mathematical formulae, they can help keep portfolios correctly balanced. Depositary reporting can also be similarly controlled every day to monitor breaches.

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