Should Banks Build, Buy Or Borrow Innovation?

In some industries, it is cheaper to buy than build — and in many cases it’s even cheaper to partner than to buy or build. Such is the recent route of KeyBank, which just inked a non-equity partnership with Aptexx, which makes payment and property management software.  The company also took a minority stake in AvidXchange in September and linked up, too, with InstaMed. The path seems to be toward collaboration, and a full embrace of FinTech disruption.

To that end, MPD CEO Karen Webster spoke with Clark Khayat, executive vice president of KeyBank, and group head of commercial payments, and Ken Gavrity, who heads product and innovation for enterprise commercial payment at KeyBank, about the best ways to onboard innovation in all of its forms.

The impetus is certainly there to innovate, said the executives, especially as Apple and other companies have been inserting themselves into the traditional purview of banks. For Khayat, the range of banking services “has expanded materially in terms of services, and even the definition in what service is … it’s fairly muddy today versus what it used to be for the function of folks like Apple or Samsung or Paypal … At the end of the day, the customer couldn’t care less about who is providing that service, but rather that the service is available.”

So for KeyBank, as it expands into new areas and inks new partnerships, said Khayat “we’re competing not just with other banks, but with anyone putting experience in front of the customer … and it forces us to think about where value is created in the process.”

When asked about the difference between delivery on retail vs. commercial banking side, Khayat and Gavrity both noted that there are “pain points” that have not been looked at or solved for. The emergence of a plethora of companies that have developed, and are developing, next technologies on the FinTech side, can lead to a bit of confusion as to just how and what suites are best suited to certain customers, and which are not.

For the commercial FinTech space, as KeyBank sees it, the pain points reside within financial operations themselves, and within the workflow process, rather than with only the payments part of a transaction. Some firms are not even necessarily aware of the costs that may be tied up within some archaic ways of doing things. Take checks, for example – the range of costs per check can be as much as $2 to $20 per check, and against that backdrop the ACH wire or next-generation payments technology becomes “a lot more palatable,” as Khayat said.

“Once we identify the capability that fits our clients, it becomes about assessing the quality of the tech and then building the integration, all within our risk and regulatory framework.”

KeyBank has been tying up with partners such as Aptexx in an effort to be able to “focus on the advice we give … and focus on the customers.” FinTech is viewed a bit differently by KeyBank, both executives noted, in that, as Gavrity said “the traditional FinTech model of picking an industry and a specific problem to solve matches up well with Key’s strategy of having industry expertise and going to a market by the industry … we identify certain companies in order to incorporate solutions … in a timely manner and to add that to the core part of our strategy. Once we identify the capability that fits our clients, it becomes about assessing the quality of the tech and then building the integration, all within our risk and regulatory framework.”

“Square changed the expectations of the client – whatever the service may be, they now see it and expect you to have it. The change is the speed of expectations.”

Looking ahead, in 2015 and even previously, said Khayat, Apple Pay and Samsung Pay grabbed mindshare. And more recently, he said, “Square changed the expectations of the client – whatever the service may be, they now see it and expect you to have it. The change is the speed of expectations,” he added, noting that some innovative firms “may not be around in six months or 12 months from now, but consumers see the technology and they want it. That drives us to 2016, and what may be the consumerization of the commercial environment. Not really learning a new behavior, but just taking that behavior and applying it to a commercial setting.” Khayat used taking a picture of a check and depositing it via that picture with a financial institution as an example – we are used to doing it at home and that will make commercial adaption for mobile RDC faster.

Given the pace of change in 2016 and the record amount of capital flowing to the FinTech space, added Gavrity, banks are scrambling to understand the landscape and figure out how to compete – in response, they’re building skills and reshaping their organizations, with, for example, appointments of high-profile innovation officers.