Four Steps for Staying Ahead of Fintech Turbulence

Banks are facing a new era of digital transformation. In this article, Wharton’s George Day and co-author Cassie Solomon explain how a traditional finance firm has embraced the evolution of fintech and thrived.

In this article, Wharton marketing professor emeritus George Day and Cassie Solomon, CEO of The New Group Consulting, explain how a traditional finance firm has embraced the evolution of fintech and thrived.

All firms are preparing for the next wave of digital turbulence. This is especially true for financial service firms who are in the midst of a new era of digital transformation of their business models. The first wave of digitization for these firms was a manageable process of moving analog activities to computers. On the horizon is a new generation of natively digital financial systems, powered by advances in big data and cloud computing, generative AI, blockchains, smart contracts, and digital currencies. This creates uncertainty on many fronts: awesome new capabilities, blurring market boundaries, information insecurity, potential competitors from outside the sector, and new or ambiguous regulations.

The leadership teams of “tradfi” (traditional finance) firms are acutely aware of these threats and opportunities and ask, “OK, but what should we do about them?” Generic warnings will not help them anticipate what is coming nor determine how to respond. But they can learn from vigilant firms in other industries. Vigilance is more than an individual’s heightened alertness: It is both a leadership and an organizational capability requiring candor, collective curiosity, and imagination. These attributes were exhibited by the leaders of Clark Bank (a pseudonym for an actual regional bank) as they coped with ongoing fintech turbulence:

Accelerating consolidation of the banking sector. Large, capital-rich banks were swallowing smaller rivals using their scale advantages and superior digital capabilities.

Tech giants like Amazon were entering financial services without applying for a banking license, through partnerships with fintech firms like Parafin, which lends capital to small businesses based on their Amazon selling track record, rather than the traditional credit score-based lending.

Major capital outflows such as the bank run on Silicon Valley Bank were at risk of becoming contagious. Social media was the accelerant that fanned “electronic panic” and moved information “at the speed of tweets,” coupled with the ability to move money almost instantaneously using smartphones.

Advances in generative AI via large language models were potentially transformative by exploiting the large troves of data held by banks to quickly produce answers to most questions with implications for compliance and lending.

Clark Bank began developing best-in-class digital capabilities a decade ago. Their goal was to become a fully digitally capable bank, offering online and mobile banking, digital bill paying, and person-to-person payments similar to Venmo, to ensure that their customers could conveniently bank with them from anywhere.

The close-knit family that led Clark Bank in 2023 had three inherent strengths that could potentially offset their small scale and help keep them competitive. First was their heritage in winter wheat futures trading which provided them with greater insight into volatile markets and shaped their risk tolerance. Second was their success in the previous ten years in creating a user-friendly digital experience for their clients. Third, was a leadership team that welcomed differing views and had a willingness to learn through experimentation.

How did Clark Bank’s leadership leverage these strengths?  They applied a vigilant learning process to: Scan Broadly, Focus Attention, Explore Deeply, and Commit to Action.

Scan Broadly

Vigilant leadership teams involve themselves in external networks and seek out fresh partners to learn from and with. They also seek diverse inputs from within their own staff, paying particular attention to new hires and people with different perspectives. This all takes time. Vigilant leaders spend as much as 50%of their time thinking about the long term, rather than spending their scarce attention focused on making incremental performance improvements.

The CEO of Clark Bank, Spencer Anderson (also a pseudonym), explained, “We used to see fintech as disrupting our industry, displacing us, but it’s become more collaborative. If you are a fintech, why wouldn’t you want to work with a tech-forward bank?”

Many community banks have charters that allow them to operate in all 50 states, making them appealing and accessible partners. But with over 10,000 potential fintech partners at last count in the U.S. alone, how will a bank know which partners to choose? These new partnerships carry unknowable risks.

How did Clark Bank exercise vigilance in moving toward fintech partnership? First, the bank sought diverse inputs from its own client base, from potential fintech partners in their community, and from its national and state regulators. Clark Bank leaders were also involved in other external networks: state banking associations, their own compliance consultants and legal advisors, and state and national regulatory institutions, all of which are working to educate their banks on the risks and rewards of fintech partnership. “Regulators are good at giving you ‘beware’ warnings. They won’t tell you what to do, just what not to do.”

Focus Attention

In an era of intensifying digital turbulence, leadership teams can be overwhelmed by the steady drumbeat of weak and ambiguous signals that raise the level of uncertainty. To help focus their collective attention on what matters most, an increasing number of organizations are engaging in scenario planning. Silicon Valley Bank illustrates a failure to use scenarios to manage systemic uncertainty. By allocating too many of their assets into long-term bonds and failing to understand the possible scenario of rapidly rising interest rates, the bank was seen as incompetent in the basics of managing bank risk.

Spencer Anderson described how the leaders of Clark Bank engaged — as a team — in deep thinking: “We drew up all the opportunities — the various kinds of fintechs we could partner with — on a whiteboard, looking at whether the opportunity was inward-facing (improve the bank’s operations) or outward facing (customer-facing). We look for places where we already know something, maybe through our exposure to certain clients.” Their leadership team represented different perspectives by design and freely debated each scenario, respecting each other’s point of view.

Explore Deeply

In addition to scanning broadly, vigilant leaders are also willing to commit resources to conduct experiments in order to learn.

To experiment and learn, Clark Bank invested money in a bank tech equity fund focused on technology innovation for regional banks, with an eco-system of more than 100 leading community banks. This fund vets the fintech companies before choosing to support them, and Clark Bank learns from the experience of the other 99 banks in the network.

Commit to Action

To remain vigilant in a rapidly changing industry, Clark Bank needed to hardwire a capacity for change into its organization. How do you institutionalize ongoing vigilance? By thinking through and often redesigning the system as described in Greg Shea’s “Work System Model”:  Be willing to redesign your structure, rewards, metrics, information distribution, tools, people’s training and skills, task/processes, and the most invisible lever of all — where and how decisions are made.

Hardwiring this capability must include helping the organization appreciate the need and the logic for the actions being taken. Resistance to change is often misunderstood by leaders as their people clinging to old habits or sentimental traditions but in our experience, it is equally true that leaders create muddled, confusing messages that are immediately belied by the legacy systems they still keep in place.

Clark Bank learned that one imperative for the bank was to bridge the cultural differences between traditional banks and fintechs. The CEO noted, “This is not for the faint of heart. Legacy bank culture is ‘steady as you go’ but tech companies are going 100 miles an hour. There is a lot more drama in a start-up culture.”

The learning process — Scan Broadly, Focus Attention, Explore Deeply, and Commit to Action — is a flywheel that will continue to turn for Clark Bank and for other vigilant companies and enable them to thrive instead of wither or sell out during the turbulence facing traditional financial services.