Article
Fintech-Friendly Procurement
In 2024 the UK economy is expected to remain flat, with the Bank of England estimating GDP growth for the next 2 years to be below 1% and a 50-50 chance of a recession by mid-year, just in time for a general election. This lack of economic growth really hurts a company’s top line and with a stubbornly high inflation rate it has never been more important to keep innovating and finding new markets, securing new clients, or better serving your current customer base.
Author:
Craig Hill
Managing Director
14th Jan 2024
A material impact to the health of the UK economy is the performance of the Financial Services sector, which represents 8% of GDP, employee 2.3m people and pay £100bn in UK taxes.
Over the last 10+ years Banks, Building Societies, Insurance and Pension companies have been quickly pivoting their technology strategy to accelerate digital adoption, to increase customer wallet share, improve satisfaction and reduce time to market. With over 73%[1] of the world’s banking activity now flowing through digital channels, it is easy to see why digitisation is an important priority for all Financial Service CEOs and CTOs.
Fintech Accelerated Growth
The transition in the financial landscape is undergoing a seismic shift with the rapid emergence of fintech companies. These innovative start-ups are leveraging technology to revolutionize the way we engage with customers, we assess suitability, transact with money and more.
Traditional Financial institutions are shifting from build to buy and neo banks are driving efficiency by leveraging technology to reduce cost. Internal Innovation departments often fail to deliver the expected ROI and are expensive to run. The growth in this sector accelerated with the arrival of PSD2 in 2018 and CMA order that saw the concept of Open Banking and enabled a more connected financial ecosystem, one that has seen an increased number of technology companies entering what had been a closed market.
The global FinTech sector has grown fast in the last 10 years, with global venture capital (VC) funding growing at a rate of 17% YoY in the last 6 years to $33bn[1] globally in 2020 (c.$4.1bn in the UK[2]). UK based FinTech’s comprise of over 1,600 firms, a number that is projected to double by 2030. It contributes an estimated £11bn to the UK economy and consists of innovative entrepreneurs, generating over 76k jobs.
Current barriers to engaging FinTech’s.
Increased Financial Services regulation and rules over the last few years have seen a dampening of companies risk appetite to engage with smaller third-party suppliers. New Regulation such as GDPR (General Data Protection Regulation), Operational Resilience, EBA Outsourcing, PRA SS2/21 and now DORA, all place layers of rules to navigate when engaging with new suppliers. Unfortunately, there are no exemptions for engaging with FinTech’s, they need to be treated like all third parties and so need to jump the same hoops, which can be costly for a small start-up firm to navigate.
To counter these known barriers the UK Government has pushed hard to create a UK tech company friendly business environment, with mixed success, the outline intent of the government can be found in the whitepaper “UK Fintech State of Nation paper” [3] and “Kalifa Review” [4] published in 2019 & 21. Independent bodies like TechNation and the FCA (Financial Conduct Authority) regulatory sandbox have been set up to generate and speed up growth, whilst the private sector has responded with increased Fintech accelerators, various university incubators and investment vehicles to attract VC funding.
A crowded market – 1,600 companies and growing make it difficult for buyers and sellers to connect easily. Simple internet searches typically throw up companies that have invested heavily on marketing, advertising and SEO (Search Engine Optimisation) enhancements, to improve their overall search engine ranking and so connecting with the right firm can be problematic.
Added to all of this, Financial Service Procurement teams are navigating a barrage of global supply chain challenges: talent shortage, historically high inflation rates, a war in Eastern Europe, Middle East conflict and heightened tension in Red Sea shipping lanes…the list is endless, so the time to search for innovative ideas and companies is always constrained.
This often results in Technology teams left to search the market for new products and solutions by themselves, which is not the most efficient use of their time and can often lead to an erosion of collaboration and trust between Procurement and Technology teams.
All this combined makes it tough for FinTech’s to get a foot in the door of the larger Financial Service firms and thus slows growth in technology innovation for all parties.
The role of procurement
The 3 key questions all Procurement leaders need to answer.
- Is my company procurement process a barrier or an enabler to accessing market first disruptive technology from the Fintech sector?
- As a procurement team are we embedded deep enough into the business to help drive selection?
- Do we ask the right questions of both our business and the market to find the right match?
The cold hard truth is most Financial Service procurement processes are not Fintech-friendly. Weighted down by years of heavy regulation, lack of investment and risk averse screening, the majority of how Procurement teams buy from the market is geared more to dealing with larger enterprise wide suppliers that are already well established. The thought of contracting with a small tech start-up, leaves most procurement and legal teams in cold sweats and running for the hills!
Innovation Priorities
The reality is that Financial Service firms will always need to have a high degree of control when engaging with Third Parties. 2024 will see the arrival of Digitial Operational Resilience Act (DORA), Financial Stability Board (FSB) toolkit[5], and a joint proposal from the BoE, PRA and FCA on increased resilience in supply chains [6], these will only further increase existing rules. The only hope that any new changes introduced help to simplify and standardise existing rules across regions and regulators, to avoid confusion and making it easier for buyers and sellers to navigate the market in a controlled way.
So, what type of things can Procurement professionals do to improve their organisation success in accessing market first Fintech solutions?
Influence future Regulation – FCA and PRA regularly engage FS firms on shaping future regulatory changes. Often regulatory consultation is managed by your internal Compliance teams, who should be engaging others internally for opinion. Procurement leaders need to ensure they have a seat at the table, voice their views and ensure future rule changes are workable and do not further restrict innovation.
Attend Fintech Events and Conferences – the UK is awash with large events where small starts ups have an opportunity to connect with potential customers. Make sure you find time to network and connect at these types of events, remembering that a conversation does not cost anything.
Simplify your Procurement Process – review and reengineer your process to factor in dealing with start-ups and smaller companies. Working alongside risk stewards and legal teams to find innovative ways to engage smaller firms faster, to try out novel solutions in controlled ways (sandbox) and enable you to fast track elements of your procurement process.
Invest in search capability of FinTech’s – Don’t wait for FinTech’s to come to you, otherwise your competitors will be faster and ultimately more successful. Proactively search the market for interesting and fresh solutions that not only meet your business needs but also fit your organisation technology requirements. In the past this would have to be limited to basic Internet searches or word of mouth, however, there has been a consolidation in the last 2 years of FinTech’s at a regional level which leads to increased visibility of new firms.
An exciting new development at the end of 2023, was the launch of a new B2B platform by Finbridge Global, that supplies a single searchable database of pre-vetted FinTech’s. Finbridge has been set up to create a unique global platform, solving the problem of how to source solutions, assess their viability as products and engage with them seamlessly and at speed, reducing the cost and time to market.
Barbara Gottardi, Founder & CEO, Finbridge Global “Our Assessment Engine streamlines the value judgement process, reduces manual effort and human error, and provides a reliable, consistent, and objective way to measure a fintech’s capabilities and competencies. It provides real-time feedback, analysis, and insights to help organisations identify strengths and weaknesses.”
For more information https://finbridgeglobal.com/
References
[1] https://www.mckinsey.com/industries/financial-services/our-insights/fintechs-a-new-paradigm-of-growth
[2] https://www.innovatefinance.com/capital/#:~:text=Global%20FinTech%20investment%20
reaches%20%2444,increase%20of%2014%25%20from%202019.&text=H2%202020%20saw%20
a%2076,a%206%25%20increase%20from%202019.
[3] https://assets.publishing.service.gov.uk/media/5cd9511740f0b62d81cad294/UK-fintech-state-of-the-nation.pdf
[4] https://www.gov.uk/government/publications/the-kalifa-review-of-uk-fintech
Consult
Current State Assessment and Recommendations
Procurement Strategy Development
Operating Model Redesign
Tranform
Leading Transformation programme
Implementing new strategy, standards or technology
Training and People Development
Deliver
Supplier Relationship Management
Contract & Performance Management
Business Partnership
Total Procurement Limited, Carpenter Court, 1 Maple Road, Bramhall, Cheshire, SK7 2DH, United Kingdom Company # 14645442