Banks are now in the third historical wave of distribution, says Aman Narain, HSBC’s global head of platforms and embedded banking, based in Singapore.
Branch banking has dominated how bank products reach customers. Physical branches are the place people go to do finance.
Since the 2000s, internet and mobile banking became the key distribution channel. Instead of going to a place to do finance, finance was placed on your desk or in your pocket.
We are now in the early stages of a third wave of integrated banking, which Narain says is incorporating finance into what you do. No place, just financial services being omnipresent in daily activities.
“Take using ApplePay in the MTR,” said Narain, referring to Hong Kong’s underground metro system. “The payment is integrated into your phone, and into your life. We’re just at the beginning of this.”
The hard part
That’s true for both consumer banking as well as for Narain’s area, corporate banking – primarily payments and trade finance.
This is why HSBC is hiring people like Narain, who joined the commercial bank last year in a new role to advance embedded banking, after a career at GooglePay and his own (short-lived) startup. He’s come full circle, having started out at Standard Chartered Bank, but he’s now on a mission to sell platforms instead of products.
But this requires a sea change in how banks operate and view themselves.
“The focus on ‘digital transformation’ has been APIs and the user experience,” Narain told DigFin. “But that’s just the superficial level. We also need to focus on the back end.”
He says all banks must address five things in order to succeed at integrated distribution:
- How to onboard clients
- How to serve those clients
- How to underwrite loans to those clients
- How to build effective infrastructure to do the above
- How to redesign products and services on that infrastructure
Yes, cloud, but…
DigFin noted that for many financial institutions, the answer, or at least the starting point, is to embrace cloud for computing storage and calculation. It took banks a while to wrap their heads around issues such as data security and compliance, but then they got very excited. Sometimes the conversation ends there.
“Cloud is a necessity, like air,” Narain said. “But there’s more to life than just breathing.”
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The purpose of the migration is to address costs for serving clients, but it doesn’t solve underlying problems of management, data governance, or product. Rather it’s the means of rationalizing legacy technology stacks and preparing the institution for data-sharing and other aspects of partnership banking.
Partnership means relying more on fintechs that bring innovative solutions. Narain says the bank is especially active in working with startups in India.
“There are tons of fintechs in India building on top of the government’s digital infrastructure,” Narain said. “They bring many components that we can plug into. But a bank needs a modern architecture to use them.”
Usually the startups are chasing the incumbent, which has the distribution power. But Narain says banks have make themselves attractive to startups as well, because they are now competing for the best partners.
One of the challenges with fintechs is they don’t scale beyond their local market. The bank can find a great KYC or onboarding fintech in India, but it may need to find a similar fintech for Indonesia or the UK. Or it can copy the tech and build something internally, although this doesn’t usually work in the long run – the bank can copy a software model but then it’s stuck without the startup innovation.
So the optimal strategy is to help the local fintech scale globally, which plays to the strengths of a global bank. Institutions that can provide an entrepreneur with a pathway to scale use this to compete for the best fintechs.
This assumes, though, that banks can operate effectively with startups. DigFin raised the question of proofs of concepts (PoCs) that smother fintechs: the banks are stingy with payment, the PoC lasts too long, the internal teams take forever to approve, and then the startup’s venture financing runs out. In today’s environment, startups will find it harder to replenish equity.
“I’ve been part of a startup, so I know what it’s like,” Narain said. He says PoCs are on the way out. They are no longer so fashionable. “Someone around here said, ‘We don’t want more pilots at HSBC than at British Airways.’”
Narain says PoCs are signs that the bank’s team lacks conviction. They are usually deployed to show the CEO or the board of directors that a fintech tie-up can work. PoCs can end up serving as an elaborate show rather than as a deployable strategy. “This is a waste of time and resources.”
Instead, he says internal research and user-experience teams can create mockups, and if they believe in the tie-up, they can address the internal processes early.
But how does Narain get around internal bureaucracies? The compliance people? Procurement?
“Procurement teams get villainized,” Narain said. Managers find it convenient to pin their own failures on such teams. “With legal, procurement, and brand, we have to engage them early and explain the strategy. It takes an effort, but it pays dividends down the road.”
The key is to select partners carefully, and once the team believes in the relationship, then go all-in. The early due diligence is the critical job.
“I want to know the startup’s founder, the engineers, the product teams,” Narain said. “I want to spend time at their office, have them visit our office. It’s not just about telling them about the bank’s policies and regulations. It’s about empathy.”
Since joining, Narain’s team has sealed only four partnerships, of which two are public. They are designed to serve either SMEs directly, or to serve SMEs that are upstream or downstream of a big multinational corporation.
In the US, it has recently partnered with Oracle NetSuite, a cloud-based program for enterprise resource planning (ERP). The service lets SMEs manage payments and automate reconciliations, such as processing invoices, without switching screens or multiple logins.
Second, HSBC has teamed up with bank-tech vendor Finastra, to plug in its FX capabilities into Finastra’s banking-as-a-service platform that serves mid-tiered banks. These smaller institutions can now provide HSBC FX services to their corporate and retail customers without any additional tech integration.
HSBC is also working on other embedded solutions with the China arm of a US multinational manufacturer and its local SME relationships, as well as developing something in India around trade receivables and working capital.
The projects all rely on APIs to integrate with the client, while Narain’s work is on the back end, addressing those five competencies he listed.
“The platform is how we externalize our services, which removes the complexity of banking for our partners and their customers. We’re taking existing products and making them simple and easy to consume. But internally, it’s complicated.”
So now that he’s got a few projects off the ground and a pipeline underway, what’s he learned? Can banks become platforms?
Narain cites three takeaways.
First, the up-front prep work is key. Operating like a fintech, with engineers and product devs, is not just the API. It’s about a lot of collaboration, including explaining how finance works to startups. This dialogue ideally builds a cadence of nailing milestones.
Second, test test test.
Third, reusability is a mark of success. Solutions should be designed to work across multiple partners. “We’re building platforms, not single-use products,” Narain said.