Finding strategic clarity in the new financial services reality

Matt Soczywko

We sat down with Gilad G. Amir, EIR at Pollen Street Capital to talk about digital transformation and the ability to build and scale new digital propositions in the financial services sector, and some of the thinking and deeper insights behind our video series with him.

Gilad was formerly Head of Fintech at Lloyds, and is an experienced Chief Executive Officer with a long history of working in the financial services industry. As an entrepreneur he is skilled in Fintech, M&A, alternative credit, risk and technology.


Matt: Before we get into the meat of what we're here to talk about, let's explain a little about who are you and what you do. You’ve had quite a storied career in banking and financial services, and now you’re an entrepreneur in residence (EIR) at Pollen Street Capital, an independent alternative asset investment management company.

What exactly does an EIR do? And how did you get here?

Gilad: An entrepreneur in residence is a role within venture capital and private equity (PE) funds that supports the fund in identifying market opportunities and building new ventures. EIRs typically have a strong entrepreneurial background and relevant subject matter expertise.

Pollen Street wanted to create a network to help the entrepreneurial companies in its private equity portfolio grow more quickly and create greater value, and were looking for someone with a specific background in fintech and financial services who could support the fund in identifying market trends and tap into new opportunities. The decision was taken to form a dedicated team - the Pollen Street Hub - to focus on maximising the potential that comes from being a sector specialist. The Hub is a new function that drives a series of activities across the portfolio. Its key aims are to unlock economies of scale, and add value through the network effect, which includes sharing best practice and advice on key issues; and also to act as a launch-pad to develop technology-driven initiatives to enable the portfolio companies to drive growth through the use of shared components, for example a value-add platform for SME businesses, and an advanced data and analytics platform for better decision-making.

M: Briefly, what are the main differences between working for a bank to a private equity fund?

G: PE and banks serve different purposes, so there are a number of differences between the two. In the context of digital transformation and the ability to build and scale new digital propositions, the differences are in the speed of the decision-making process within a PE fund and the ability to crack on to turn opportunities into reality in very short cycles. This can be attributed to culture and the fact that it is often a smaller group of people with strong expertise involved in the decision-making process. With that, comes much greater responsibility and accountability. I think that PE funds - with the much greater ‘responsibility-per-capita’ their team members have compared to banks - are a living proof that banks can innovate and become agile if they adopt the right culture.

M: In our video series, you described three strategies banks can employ to stay relevant—developing platforms, vertical value chain control, and API-as-a-channel or ‘Invisible Banking’—what are some really up-to-the minute examples of the different strategies that have impressed you and why?

G: If we think of horizontal expansion (platforms), vertical expansion (value chain control) and API-as-a-channel, in my mind the most obvious example would be Starling bank, as a challenger bank that curates an ecosystem of vendors to enrich its core proposition and allows its customers to access a broad range of services over the app. Two other examples would be Square and Paypal, who are both expanding vertically through M&A and consistently capturing more parts of the value chain.

Finally Goldman Sachs - a global player of considerable size that has managed to build advanced infrastructure and APIs, demonstrated by their ability to support the new Apple card. That’s a great example of how APIs can become a strategic channel.

Goldman Sachs has managed to build advanced infrastructure and APIs, demonstrated by their ability to support the new Apple card. That’s a great example of how APIs can become a strategic channel.

M: As a marketer who’s worked a lot in digital marketing and performance marketing on 'GAFA' products, I’ve become used to tools that bring us closer to hyper-personalisation, or even ‘segment-of-one’ journeys, in the same way one’s feed on social media is entirely unique to the individual.

Banking has slipped behind on this kind of customer-centricity, and they don’t tend to start from the perspective of the customer in the same way we do in digital-first industries.

I know you’re very interested in platforms as a strategy for banks to remain relevant - is it through platforms that you see banking services becoming more personalised, and potentially catching up with what’s going on in other industries?

G: It’s important to explain the overarching theme before answering your question, of which platforms and other digital strategies are a subset.

We are rapidly moving towards a hyper connected world, which coupled with much better use of data and channels, enables convenience through much more relevant and timely digital experiences. In very simple terms, this combination allows customers to access the right service, at the right time and through the right channel. Customers want convenience and are ready to pay for it.

We are rapidly moving towards a hyper connected world, where customers can access the right service, at the right time and through the right channel. Customers want convenience and are ready to pay for it.

That obviously applies to financial services, where a platform strategy, that is mainly applicable to Tier 1 retail banks who serve the mass market, is one way to offer customers convenience through a more holistic and connected experience. As banking licenses and technology become a commodity, I think that there’s an increasing (re)acknowledgement that the most important asset is the customer, who is now used to booking a taxi or a room with a click of a button, and doing their weekly grocery shop from the couch with Amazon Fresh, while watching Netflix or listening to their favourite playlist on Spotify.

That’s a new and very different world from the static world banks are used to, and requires banks to reinvent themselves through strategic digital transformation processes, the ultimate goal of which is to enable customer-centric connectivity and value-add services. Beyond the basic hygiene factors like moving to cloud, automating manual processes, building APIs, automating KYC, omni-channel servicing etc. this will require banks to decide which type of platform they want to build and what are the technical, operational and commercial implications.

Smaller or more specialised banks will most probably ‘stay connected’ by executing other strategies, based on the business focus and state of the tech stack. In simple terms, if you are not relevant enough to bring customers and keep them on your platform, you’ll need to be where your customers are. That said, I don’t think these strategies are mutually exclusive and may be executed in parallel by incumbent banks.

In simple terms, if you are not relevant enough to bring customers to your platform, you’ll need to be where your customers are.

M: There are fintechs who are starting to own more of their vertical value chain—Habito springs to mind—who are now moving from being brokers, to actually offering mortgage products. What are other examples of value chains you can see being disrupted in this way?

G: Habito is a great company and an interesting example of a business that started as the next generation of mortgage brokerage, and is now pivoting to an end-to-end vertical strategy. I’m using the term pivoting rather than expanding, as I think that in Habito’s case moving up the value chain and launching the new lending proposition was more reactive and less strategically deliberate, following their acknowledgement of how fragmented and messy the mortgage industry is, and what it would take for them to build a scalable business in this environment. As they already cracked the customer acquisition bit, the vertical move makes a lot of sense. That said, I wouldn’t be surprised if at some point they will let other lenders use their ‘lending rails’. We can expect to see similar moves by other fintechs.

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I will mention again Square as the most apparent example of a company that consistently captures more parts of the value chain and is gradually becoming the one-stop shop for merchants, and Paypal who has been executing a similar strategy with its acquisition spree. Another interesting example would be Stripe and its expansion to the application layer.

M: There are examples of fintechs/challengers finding whole gaps in the market that the incumbents aren’t serving, for example in different aspects of lending (Monzo releasing salary payments early to current account customers), new investment opportunities for the mass-affluent (for which we worked on a product called My Pension for Charles River Associates), and alternatives to overdraft payments (like the challenger Current who has got rid of them).

My question is twofold - can incumbents be reactive to these changes in the market, and which shifts do you think are really significant?

G: That’s a good question, which touches some core aspects of the digital transformation efforts we see everywhere these days, and should be analysed through two different lenses:

The first is ‘do banks WANT to serve those niche markets?’ The answer to which obviously goes beyond the narrow commercial interest and involves broader considerations like ESG, financial inclusion, public opinion, regulatory and government expectations etc. The second question would be CAN banks serve those niches?

I think that the answer to both will change over time:

In horizons one and two, which represent the next two to five years, as long as banks are wired to serve the mass market and busy with fixing their foundations, they will struggle to systematically execute the ‘fast follower’ strategy even if they want to, directly or via a platform. Banks simply can’t identify the need and rollout propositions at such pace or the costs that will make commercial sense.

As long as banks are wired to serve the mass market and busy with fixing their foundations, they will struggle to systematically execute the ‘fast follower’ strategy even if they want to, directly or via a platform.

In the longer term - once the transition from the current ‘serving the mass market/ take-it-or-leave-it’ approach to the ‘segment-of-one/rejecting customers is not an option’ will be completed—with everything these buzzwords encapsulate—banks should be able to identify customer needs and serve them much better and faster, either by open platforms that will be underpinned by massive data and analytics, or by hyper-specialised vertically-focused end-to-end propositions.

M: You’ve spoken a lot about what’s becoming known as ‘invisible banking’- where banks have a partnership where they provide the underlying service via an API to a partner - where they can win on things like price, or speed of application handling.

Can you expand on that idea, perhaps with examples from the market that you find interesting? Teleco looks like being a big sector for this, with both T-Mobile, and you could argue Apple Card (via the iPhone), being examples of this strategy.

G: The invisible bank concept means that as a bank I can stay connected to customers where they are, by immersing my products and services into their lives and businesses’ routines and at the point of need. Obviously, the invisible bank concept must be underpinned by a very successful execution of an API-as-a-channel strategy.

The invisible bank concept must be underpinned by a very successful execution of an API-as-a-channel strategy, where banks develop a range of APIs that allow them to distribute products via other digital channels and augment connectivity.

API-as-a-channel means that banks develop a range of APIs that allow them to distribute products via other digital channels and augment connectivity. In very simple terms, it allows banks to go to customers and serve them where they are. Obviously, the better the APIs are, the more options banks will have to tap into new distribution channels, have more touch points with customers and be where relevant customers are.

That said, we need to remember that APIs are just pipes, or the lollipops in technical diagrams. Therefore, building APIs and executing an API-as-a-channel strategy means that those APIs must be underpinned by advanced digital onboarding, underwriting, decisioning, and fulfilment capabilities.

The invisible bank, and more generally API-as-a-channel, would be applicable for those FIs who have superior cost-to-income ratio—and can compete on price—and/or have developed specialised digital journeys and servicing capabilities for specific segments, that offer greater convenience for customers in those segments.

Telcos are probably the most obvious candidates for expanding into financial services off the back of Open Banking, considering the massive customer base, the data they already have on their customers and their need to build stickier services and generate new revenue sources. We could argue that banks will experience the same with customer’s data custody and digital identity within 5-10 years.

M: You’re an expert on SMEs—their cash flows, what metrics really matter, what tools they should be using, and more broadly how they can succeed in operating. Perhaps you can share some of your ideas, for example on how this market is still not being served very well?

What are the opportunities for vendors, and equally what do you think are the biggest considerations for SMEs that tend to be forgotten?

G: Thanks. In the last 20 years of digital banking and fintech evolution, the SME segment has been neglected and underserved by banks, regulators and fintechs. This ironic phenomenon is a direct result of regulatory requirements—Basel II and III for example, prejudiced perceptions of risk associated with SMEs, and the low profitability of servicing SMEs as a result of banks and fintechs treating SMEs with scaled-down frameworks of larger businesses, or scaled-up frameworks of consumers. Obviously both are not fit-for-purpose and resulted in undeserving this important segment.

In the last 20 years of digital banking and fintech evolution, the SME segment has been neglected and underserved by banks, regulators and fintechs.

If we think of the exorbitant rates SMEs pay for FX transfers, the time it takes to apply and receive a loan and under which terms, the fact that SME owners still need to look in parallel at two different screens and a pile of papers to understand if they can make the next salary payment, and so on, we’ll understand that there’s still a very long way to go to better serve SMEs.

The discussion about opportunities in the SME space should start with a simple question, which is—what do SMEs really need? I don’t think there is a simple answer to it, as SMEs are not homogeneous, yet there are certain common needs that banks and other FIs can address, and by that become a trusted partner to SMEs and build much stickier relationships. With Open Banking, HMRC Developer Hub, the transition to cloud accounting and other enabling technologies like AI and DLT, we’ve reached a tipping point and are at the outset of a new era with many exciting opportunities in the SME space.

SMEs are not homogeneous, yet there are certain common needs that banks and other FIs can address, and by that become a trusted partner to SMEs and build much stickier relationships.

A quick look at SMEs’ routines and challenges will reveal that the vast majority of SME owners are short of time and knowledge. It means that any service that can save time and help them take more informed decisions is of value. As banks and accounting packs fall way too short in both dimensions, fintechs have massive opportunities to build valuable propositions to SMEs and banks (under a B2B2C model) that will significantly change the way SMEs run their business and interact with their finances.

In the longer term, as fintechs grow to better understand SMEs and how to connect the dots, and some of the enabling technologies like DLT will mature, we’ll see a world of new and very innovative, SME-focused services and technologies. It’s not hard to imagine for example, how a Monte Carlo simulation will be used to forecast affordability and overall financial health, how Miller-Orr and other similar models will underpin a smart cash manager, or how a shared DLT-based ledger will mirror accounting records to reduce fraud, insolvencies and unlock working capital. And these examples are really the tip of the iceberg.

It’s interesting to read the recent review Huw van Steenis wrote to the BoE and Mark Carney’s speech at Mansion House, both surface some of those gaps and signal regulators’ appetite to better serve SMEs.

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M: Back to banking for a moment, Open Banking means potentially fintechs can provide many of the services of a bank—data, analytics, even payments if they have the PISP license—without a banking license. Has having a banking license lost its relevance to some extent? Or how do you see this playing out?

G: That’s correct, and I don’t think we can overestimate the impact of Open Banking and the tectonic shift of banking to the application layer and distribution. To a large extent Open Banking, coupled with other regulatory activities, turned banking licenses into a commodity and in the mid to long run will trigger a redistribution of margins across the value chain.

If we take a step back and try to see the bigger picture, the CMA remedies and other regulatory activities, it's fair to say that the CMA lays Open Banking as the foundations to a seamless and much smarter price comparison and product switching, that will massively benefit consumers and small businesses. We can expect to see additional regulation in the space, that for example will prevent FIs from charging penalties and other fees for product switching, or that such penalties will be fairly disclosed in a way that will allow customers to compare.

The CMA lays Open Banking as the foundations to seamless and much smarter price comparison and product switching, that will massively benefit consumers and small businesses.

M: I know you greeted the announcement of the new Apple Card with enormous interest. Have you had any more thoughts on the future of Apple Card since we last spoke, either from takes you’ve come across, or your own thoughts on how others can learn from the approach of Goldman Sachs?

G: The new card will allow Apple to increase its exposure to financial services from a very interesting angle and build a massive and loyal customer base. I’d assume that GS has some sort of time-limited exclusivity, and at some point GS will be replaced by a variety of other financial service providers, who will offer the same customers a wide range of financial products. That said, I think Apple will struggle to launch the card in Europe due to the regulatory environment.

Goldman Sachs’ digital evolution and its activity in the fintech space is a fascinating phenomenon and an example of what banks can do when there is a clear commitment from the top to walk the extra mile, and execute a beyond-compliance, coherent tech-enabled strategy. An analysis of GS investments, acquisitions and home-grown propositions would reveal a forward thinking and well thought out strategic agenda. If we take Marcus as an example, while there’s nothing really exciting in Marcus from a tech perspective, the fact that GS has successfully built it and is continuing to scale it internally, puts GS in a different league from the other big banks in terms of its ability to reinvent itself and execute a new strategy.

M: You’ve referred to platformisation as the rebundling of financial services, do you still believe this, and how far do you think this trend of rebundling will go?

G: Yes. At the basic level platformisation essentially means that the platform owner bundles (on the sell-side) a variety of products and services that have been unbundled by fintechs and others over the last 10 years. It’s hard to say where the industry will be in 10 years time considering that on the one hand, banks have been rapidly closing the basic gaps, while on the other the industry gradually shifts to the application and distribution layers, which are much more challenging to banks.

With some exceptions, it isn’t hard to imagine how in 10-15 years platforms, as we understand this term today, will evolve into very smart optimisation engines that seamlessly/dynamically switch products for customers—and this applies to SMEs and corporates—behind the scenes. In other words, those ‘platforms’ will be ingrained in the customer ecosystem and will be much more aligned with the buy-side’s best interest.

It’s not hard to imagine how in 10-15 years platforms, as we understand this term today, will evolve into very smart optimisation engines that seamlessly/dynamically switch products behind the scenes.

M: Thanks Gilad.


For more perspectives on devising pragmatic strategies in the new financial services reality FIs find themselves in, follow our video series with Gilad on our LinkedIn page.

Matt Soczywko is Head of Marketing at Elsewhen. He’s worked as a marketer both freelance and in-house at startups and studios in his native city London for almost 10 years, working across brand, content, performance, copywriting and video.

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