IBM Platforms CTO On Collaboration Between Banks, Fintech Startups: 'There's No Shortage Of Desire On Either Side'

This story is the first in a multipart series by Benzinga on the state of the fintech sector in 2018.

The relationship that big banks have with fintech startups is a big-picture story in the finance sector.

Beyond the headlines, there are natural areas of friction between institutions and startups, and IBM IBM Platforms Chief Technology Officer Tom Eck is focused on them.

When Eck spoke at the 2018 Benzinga Global Fintech Awards in New York in May, he told the audience IBM has relationships with nearly every financial institution on the globe, positioning Big Blue as a matchmaker between fintech offerings and financial sector needs.

In a new interview with Benzinga, Eck said the cultural and structural differences between banks and the fintech solutions they adopt lead to questions about security; the difficulty for startups in navigating a big bank’s vendor review process; and a mismatch in that much of the data banks hold is on-premise and most fintech solutions live in the cloud.

“There’s no shortage of desire on either side of the table — fintech and large institutions,” Eck said.

“They both want to work with each other. Obviously the fintechs see the financial opportunity and the banks see an opportunity to leverage some great tech that they just don’t have the bandwidth, focus or resources to build themselves — and the fintechs are great incubators for innovative ideas.”

Want to learn more about the industry and meet leaders of the hottest fintech startups in person? Be sure to grab your tickets to the Benzinga Fintech Summit on Nov. 14 in San Francisco before they sell out.

A Hybrid Cloud Strategy

Banks and fintech startups have what Eck calls “an impedance mismatch,” in that banks are slower-moving as a function of the highly regulated environment in which they operate, with billions of dollars in play.

When Eck hears the word “innovate,” he usually equates it with the word “faster,” Eck told Benzinga.

“That’s something that banks aspire to, but it’s gotta be within the laws of physics, right?”

Many banks are tied to older technology that predates the cloud and cloud-based solutions, Eck said.

“So there’s a technology challenge on the bank’s side, but there’s also compliance officers, security officers, risk officers — all of these gates that you have to get past to be able to actually deploy something. I’ve been there; it’s quite painful.”

A solution that Eck offered: a team that works in a cordoned-off “sandbox” area of a bank’s tech department.

Financial institutions are moving to the public cloud, but not all are ready to move all of their data off-premise, Eck said.

“That means that a nontrivial part of the technology phase is still on-premise. That presents quite a challenge to the fintechs.”

In the case of a machine learning platform, the data runs in a cloud, and convincing a bank to send its data there is “not a given,” Eck said.

IBM launched a hybrid cloud strategy in fall 2017, Cloud Private, that attempts to address this.

“Theoretically, with little to no code changes, the fintechs can now extract a whole new market of financial services institutions that are not ready to consume the fintech services on the cloud. But maybe by partnering with us, we could help them deploy it into our on-premise.”

IBM As Matchmaker

IBM sees an opportunity in the due diligence it performs on fintech startups for banks, and the way in which IBM accompanies fintech companies to bank meetings, Eck said.

“The banks seeing that IBM is in the picture makes them feel better and the fintech [companies], most of them get that — they probably could not have walked into this meeting. I don’t think it adds more legitimacy, but it definitely addresses the risk part.”

IBM has had internal discussions with clients about whether a business exists within the idea of Big Blue providing in-depth intelligence on fintechs, Eck said.

The CTO said he prefers to deal with startups with interesting technology that have a revenue stream, customers and an API in place that IBM and its bank partners can analyze.

“Imagine a bank has gotten to this stage where they’ve found this fintech [startup] through the IBM cloud for financial services, and some engineering team has walked through some of our starter kits, which are actual, fully sourced code projects that have already integrated with the fintech APIs as well as IBM Watson’s APIs, so it makes it very easy for the engineers to kick the tires — no friction,” he said.

“OK, great. So now what?”

Carfax For Startups

An “unscientific poll” of banks revealed they have between 200 and 400 steps for a vendor to be reviewed, contracted and placed on an approved list, Eck said.

“Imagine a fintech has to do that for even one bank, but let’s say they’re successful and there are three banks that want to use them. They’re going to collapse under the weight of that process.”

An overlap exists between the review process at different banks, Eck said.

In his view, this creates an opening for IBM to potentially perform some of the review process on behalf of the banks: a Carfax report for fintech.

Startups would be reviewed on their technical criteria, security, compliance, capital structure and other factors.

“We’ve kicked that idea around [and] even possibly using blockchain to validate the assertions that we’re making … a bank reviewing this information would see it’s timestamped and cryptographically signed and that it can be trusted,” Eck said.

“Possibly we would offer this as a paid service or maybe you would buy per report. We haven’t gotten that far. But I think that’s an interesting service that somebody like IBM could offer that would help both sides.”

Chris Dier-Scalise contributed to this report.

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Photo: IBM Chief Technology Officer Tom Eck speaks at the Benzinga Fintech Awards in New York City in May. Photo by Mandar Parab.