Fintech innovation and regulation: Is your culture resilient?

Financial services organisations struggle to compete with fintech in terms of innovation, and part of this is due to their response to close regulatory scrutiny. How can fintech avoid the same mistakes, and what are the warning signs?

Working recently with a senior leader from a high street bank, we got talking about why innovation is so hard in that context. We need, he said, to strike a balance between being a startup — innovative, experimental and fast moving — and a nuclear powerstation — where a meltdown could have consequences for the whole country, and safety is paramount.

The cultures and governance models of financial services organisations are more aligned to the nuclear power station than the startup. For leaders in regulated roles those responsibilities can feel a palpable burden to them and to those around them, and this burden makes it harder to innovate.

Fintechs do not feel the same burden, but they may start to feel it soon. In January of this year, while coaching a fintech engineer, I spotted a whiteboard in the corner of our room. On it it said: “Things to panic about: MIFID2”. As fintech becomes more mainstream, the more customers are at risk, and the closer that regulatory scrutiny is likely to become. Enforcement, close and continuous supervision, or the senior managers regime (SMR) may come as shock for fintech; a shock that could damage innovation culture.

I have had a chance to see both sides, having worked closely with leaders under SMR and with startups. From what I have observed, here are some key watch outs for fintech leaders: the signs that your culture may not stand up to closer regulatory scrutiny. These signs may indicate unhelpful cultural traits that will be exaggerated when the pressure of regulation increases.

Symptom: Colleagues over explain their decisions, often with long powerpoint decks.

Cause: Your team are managing defensively. In his book “Risk Savvy” Gerd Gigerenzer uses the term “defensive management”. Defensive management is management in anticipation of Risk Savvy: How to Make Good Decisions, Gerd Gigerenzer (2014) what could go wrong. For example, Doctors recommending unnecessary tests in anticipation of being sued. Defensive management often results in wasted effort, indecision or risk avoidance.

Over explained decisions can be a sign that your team don’t feel empowered, and don’t trust heir own judgement.

Symptom: You never hear bad news any more.

Cause: Your team don’t feel psychologically safe. Psychological Safety relates to people’s perceptions of the consequences of taking interpersonal risks. In layman’s terms, in order to express worry, doubt or uncertainty, or to admit mistakes, a person needs to feel psychologically safe. Google’s Project Aristotle recently identified psychological safety as one of the markers of their top performing teams. In some ways tech and fintech are good at this.

Agile methodologies encourage fast failure. However, there is a difference between admitting a failure that is part of a “safe” learning process, and admitting to having made a blunder. And some aspects of entrepreneurial culture run counter to psychological safety: charismatic and brilliant founders can be hard to challenge. As leaders, admit your own mistakes, and when junior colleagues challenge you, praise them.

Symptom: You don’t look like your customers.

Cause: You are in a fintech bubble. Particularly for products aimed at the mass market, it is essential that you understand your customers, and one of the best way to do that is to ensure that you represent them. This is not a strength at present for fintech: this year fintechs were admonished by Nicky Morgan for being slow to sign up to the Women in Finance Charter. Also, many fintech leaders are exiles from banking, with the narrow networks and perspective that can come with that. As leaders, deliberately hire people different to you and take representativeness seriously.

Symptom: When you want to change or improve performance, the first lever you turn to is variable reward.

Cause: You have trained your staff to chase rewards, not think for themselves. B.F. Skinner showed that rats will learn to press a button in order to receive a reward. Where bonuses are driven by specific targets or deliverables the same principles are being used. The danger of this is that you may be training your colleagues not to think. Many organisations tried to address the
challenge of PPI mis-selling, and other conduct issues, but changing their reward systems.

Sales targets were replaced with customer contact targets. As a result employees clocked up hours with customers without selling them any products. What was required was a nuanced judgement matching customer need with products, and the simple reward methodologies were not driving that.

Symptom: You see risk and compliance as a threat to innovation.

Cause: You are thinking about risk too late in your innovation process. As fintech grows it is inevitable that the lines of defense — compliance, risk and audit — will grow with them. For some larger organisations these control functions are seen as the policeman, the person looking over their shoulder telling them what they cannot do. If this is the perception — of either risk or your business — you have got something wrong. Risk management, like innovation, is the art of making predictions in uncertainty, and it can add real value at the beginning of the innovation process. Also, many of the things that risk will care about — particularly conduct — are the things that your customers care about. Bring in risk thinking early, and when you prototype test for negative outcomes as well as positive ones.

Symptom: Colleagues are cynical about your company values.

Cause: Your values are not aligned to your product. Values and culture are intertwined. Values are what you believe to be right or important, and culture is set of symbols and interactions that grow organically around that. However, values also need to be helpful. They need to be an effective guide in ambiguity, and a guide that helps you not only be better people but build better
more successful products. If your values are not helping you succeed, they will not survive, no matter how good the intention. Once there is gap between espoused values and the values, you have lost your moral compass, and in a regulated industry that is dangerous.

If you do suspect that these cultural traits are developing, now is the time to take action. They may not be fatal now, and there is a good chance that there are more pressing tasks on your to do list. However, the longer these cultural traits remain the more entrenched they become. As you grow and the market matures, don’t let your culture become your Achilles heel.