by Susanne Chishti, CEO FINTECH Circle & FINTECH Circle Institute
How can top financial services management embrace diversity and financial technology innovation while facing the potential risk of a global recession triggered by the Coronavirus pandemic?
The financial services sector is evolving rapidly, with a growing number of new entrants in the form of fintech start-ups and tech giants disrupting the status quo. Many fintech companies compete with established financial players, while other business-to-business fintech firms look for collaboration opportunities. Running a successful bank, insurance company or asset manager has never been harder, with so many competing financial and non-financial targets to be met in a highly regulated environment – and many strategic options for strengthening an institution’s competitive position exist.
On top of this, decreasing trade flows have already reduced the economic outlook due to the coronavirus pandemic, led to a capital markets crash not seen since the last financial crisis and the risk of a global recession becoming more likely.
At a time of crisis leadership matters. What all financial organisations have in common now is that corporate governance and the role of their boards becomes more important, especially in today’s world, with pressure on profit margins, faster market cycles, constantly changing customer demands and complex and costly compliance and regulatory environments.
A well-rounded and diverse board offers not only relationships, expertise and credibility but can also fill important knowledge gaps and add strategic insights to complement the executive team with broader customer understanding and financial technology know-how. It’s crucially important today that boards understand the potential applications of fintech innovation and have experience in deploying new business models and agile working practices to transform organisational cultures if required.
The Institute of Directors summarises the goals of boards as follows:
• Establishing vision, mission and values
• Setting strategy and structure
• Delegating to management
• Exercising accountability to shareholders and being responsible to relevant stakeholders
When everything around you changes – as we can see in finance today, and accelerated even further by the spread of Covid-19 – establishing the vision, mission and setting the corporate strategy becomes much harder. This is true for both fintech companies and incumbents but in different ways. While fintech companies often have strong technology understanding thanks to their founders and their executive team, they might need to complement that with more commercial, financial or compliance and regulatory know-how. On the other hand, established financial institutions often want to complement their existing ranks with financial technology expertise, to better understand the strategic options ahead. Both have shifted towards remote working models so that employees don’t have to commute and can self-isolate if required.
In terms of gender diversity among their senior executives and board members both have a lot to improve.
Heidrick & Struggles published a report, Closing the Gaps in Fintech Boards, last year, which analysed fintech companies from early stage start-ups to late stage pre-IPO growth companies. It concluded that among fintechs there is a strong demand, but only limited talent pool, for “operational leaders-turned investors […] The value these individuals bring comes from extensive operating experience – often in CEO, general manager (GM), or chief financial officer (CFO) roles. More recently, many of these individuals become active investors in fintech. This talent pool is relatively new in financial services and fintech.”
The same report explained that 50 per cent of later-stage growth companies have at least one woman on their boards. In other words, 50 per cent have an all-male board. This lack of diversity, not only among the established financial services sector but also in the new fintech sector, is a big concern. According to The Harvard Law School Forum on Corporate Governance’s 2019 report, Views from the Steering Room: A Comparative Perspective on Bank Board Practises, “an appropriate mix of professional backgrounds and profiles enable boards to consider strategic matters from various angles – including the angel of clients; to think out of the box; and to avoid groupthink. In other words, diversity is good – not only gender but also skillset and cultural diversity.”
So how can financial institutions help themselves to become more diverse and more knowledgeable about financial technology and changing market dynamics, in order to be able to respond responsibly and creatively to the coronavirus challenge and develop scenario plans depending on various possible economic outlooks?
The answer to the first question is easy – hire more women and non-white board members to add a diverse skillset to your boards and leadership teams. The 30 Per Cent Club has done a great job in promoting board diversity. Its vision is that “gender balance on boards and in senior management not only encourages better leadership and governance, but diversity further contributes to better all-round board performance, and ultimately increased corporate performance for both companies and their shareholders.”
A diverse board will be better prepared to deal with a global economic slowdown and the resulting uncertain economic future – things we are all currently facing.
In terms of fintech knowledge, the Fintech Circle Institute runs fintech masterclasses for leading financial institutions. The classes look at the market in a holistic way, centred on the idea of the “Fintech Cube”…
When we analyse new fintech companies, we always ask the following three questions to determine the competitive landscape the start-up operates in:
• Which financial sub-sector is the start-up working in? (For example, retail or commercial banking, capital markets, asset management, insurance)
• Which business model does it use? (For example, business-to-consumer, business-to-business, business-to-business-to-consumer, platform, peer-to-peer lending, crowd-funding)
• Which technologies does it deploy?
Equally, when developing an innovation strategy for a corporate, it is important to stay client focused – for example, ask yourself where the biggest value opportunities for customers and end-users are, or what the overall value framework is. The client demand normally determines the first. Then, optimum business model and technologies must be designed and selected to provide the best overall solution to create value for the client.
Fintech skills and diversity for finance boards are invaluable both short- and long-term, as the competitive environment for financial institutions changes rapidly, and having the brightest minds at the boardroom table to prepare for a global slowdown or recession becomes more crucial. New skills and strategies can be better implemented by a board that has already put gender, skillset and cultural diversity at the forefront.