• Mark Fenwick and Erik P. M. Vermeulen

Building the Sustainable Financial Service “Ecosystems” of Tomorrow

In our latest paper, "Banking and Regulatory Responses to FinTech Revisited: Building the Sustainable Financial Service 'Ecosystems' of Tomorrow," we revisit the question of how incumbent financial institutions (most obviously, banks) and financial service regulators should respond to the challenge of FinTech. In particular, we argue that incumbent financial service providers can learn useful lessons from the experience of the most innovative companies and their efforts to navigate the new realities of doing business in hyper-competitive and technology-driven global markets.

Our main claim? Understanding how businesses in other sectors of the economy have leveraged the new opportunities of digital technologies can provide a useful source of inspiration for financial service providers. Regulators can similarly benefit.

One of the striking features of successful large businesses with an established track record for sustained innovation and success has been their capacity to reinvent themselves as open, dynamic ecosystems. Such companies recognize the existential challenge posed by the emergence and proliferation of digital technologies and have transformed their governance, organization and operations.

Closed, bureaucratic hierarchies have been replaced by more entrepreneurial organizational structures. For example, many innovative companies now organize around multi-disciplinary teams. Such teams work closely with the customers, for instance.

High performance teams have become a “buzzword” that you often hear at conferences these days. As such, the traditional world of corporate organization is being turned “upside down.” The experience and know-how of senior management as the primary source of corporate leadership is being displaced by the energy and creativity of smaller, innovative teams.

Another effect of this organizational shift is that the traditional borders between the “inside” and “outside” of companies are disappearing. For example, the strict divisions between production, marketing, and legal departments are being displaced by flexible “nodes” that perform diverse tasks and functions that they define themselves, depending on the specific task at hand.

Moreover, the borders between the company and other market actors are similarly blurred. New forms of partnership are becoming the norm. A crucial element of these strategies is a recognition of the value of “co-creation,” namely an inclusive, collaborative partnering between incumbents and non-traditional players. To implement this objective, the most innovative companies recognize the need to absorb the skills and resources of the most dynamic startups.

Crucial to the success of this approach is the implementation of effective corporate venturing strategies that continually feed dynamic, technology-driven innovation (“borrowing the startup genie’s magic”).

Too often, the focus of the corporate venturing debate has been on corporate venture capital, i.e., investments made by corporates in order to acquire minority stakes in a smaller third-party startup company for monetary gain. If we look at most innovative companies, however, we can see that this strategy alone is not enough for large corporations to survive in a world where the pace of innovation is constantly accelerating.

Instead, the world’s most innovative companies go beyond this traditional model of corporate venturing. In our paper, we identify seven new corporate venturing strategies adopted by the most innovative companies in order to feed the capacity for innovation and co-creation. We argue that incumbent banks and other financial service providers might utilize similar strategies in responding to FinTech. Indeed, the goal of each of the discussed strategies involves a corporation adopting practices that creates an ecosystem conducive to partnering-for-innovation and technology-driven co-creation.

With the exponential growth of technologies and fast innovation cycles, companies now operate in an increasingly uncertain environment. We cannot expect the traditional bosses and managers to lead the workforce towards success under such circumstances. The origins or sources of success need to be found elsewhere. Traditional institutions, in particular, need to look for inspiration from different places and this means opening up or “unbundling.” A new style of corporate venturing offers an attractive option.

The paper ends with a discussion of the implications of such an account for regulators and regulatory design. In order to establish effective ecosystems, regulators need to become active participants in these new ecosystems. We characterize this approach as “community-driven regulation and identify some key features of this approach.

In particular, governments must work in partnership with all the stakeholders in tech-companies to ensure that important interests are protected while facilitating innovation. There is already some evidence of such a shift. Regulators acknowledge their informational disadvantages and are participating in more events and building new collaborative relationships with actors in the private sector to better understand emerging technologies. Such community driven regulatory design is a radicalized form of policy experimentation in which regulators and companies work together to protect consumer interests and ensure that responsible innovation is given the space to flourish.

Mark Fenwick - Kyushu University

Erik P. M. Vermeulen - Tilburg University & Signify

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