Westpac's Duncan: “We need to welcome partnerships to drive innovation”

• A handful of fintechs with global scale may threaten banks, though within niches
• Even though internal innovation is important, it achieves just incremental change
• Westpac’s partnerships with fintechs lead to non-linear leaps

With customer expectations and the world of financial services changing rapidly, Westpac chief development officer Macgregor Duncan said, “We need to change.” The bank needs to make what he calls “daring raids” and experiment to secure its base. At the same time, he noted, “You can’t forget that you’re running a large business. Twelve million customers are counting on you.” To make the changes it needs within its domestic market, Duncan said Westpac is partnering for new capabilities and developing new business models.    

Rather than seeing fintechs as a threat, he said, Westpac now sees them as an opportunity to partner on a mutually beneficial basis. “We joked, a few years ago, that fintechs were going to eat us for lunch. Now, we’ll get together for lunch. That feels more productive.”          

That said, he acknowledged that a handful of fintechs that emerge from the startup world and gain global scale can become a threat to banks, albeit within niches. “Payments is an example. For a local universal bank like Westpac, which manages many lines of business, it’s difficult to compete with flow monsters like Stripe, who are looking at moving into our market.” Global fintechs, which also include Square and Adyen, “have capex capabilities that dwarf ours within that domain. They’re investing billions in new payments capabilities, which they amortize across a global base. We find it difficult to invest to compete. We’re looking to partner with fintechs, global banks, to share that capex expense, to develop capacity which can compete. We’re being realistic about our own position, partnering with large organisations and small organisations like fintechs to give us the capability.”

Innovation comes internally and through partnerships

Westpac has different models for innovation, Duncan said. It has an internal innovation team, runs five co-labs around the world which are primarily focused on partnering, and has a dedicated $150 million corporate venture fund that invests directly in startups from the Westpac balance sheet.

The reason the bank needs different options, Duncan said, is that some options are better at solving different things. The internal team is good at incremental changes in the existing suite, for example. “They are often design thinkers, user experience, customer journey. Within that they work internally. They need to look at existing relationships, how we can we improve.” While it is important, change tends to be linear. However, “the future is not linear. You can’t just project the future from where we stand today.”

To make non-linear leaps ahead, he said, the bank likes to partner outside the organisation with entrepreneurs who are close to customers and see the world changing in different ways than the bank might expect. “Westpac is predisposed to partnering,” he said. “We feel like we don’t have all the answers.”

“To the extent we’re looking at moving to the region,” Duncan said of the bank’s foray into Asia, “we’ll look at doing it differently than in the past. We’d be looking at moving selectively through fintechs, partnerships, trying to find niche opportunities.”

Partnerships with Zip and Assembly Payments

As one example of a partnership domestically, Westpac invested in Zip, which offers a pay-later digital account. “When we made the investment eighteen months ago,” Duncan said, “our investment committee was sceptical. They said, ‘I don’t understand why anyone would be interested. You can get it from a credit card.’ Our response was, it doesn’t matter. A generation is moving toward a new capability. We made that investment. Eighteen months later, Zip acquired over a million customers. Zip has not spent a dollar on customer acquisition. Merchants do their marketing. It’s a great example of where banks think linearly, rationally, about the future. We now have this privileged position with one of the market leaders used by millennials. An internal innovation probably would not have gotten us to this position.”

As another example, Duncan said Westpac has partnered with Assembly Payments in Australia. “We’re looking to build the next generation of merchant payments capabilities, in-store, ecommerce, third-party ordering apps, integrated in one experience. The reason that’s important is we’ll have a single data source. We’re trying to balance payables and receivables. That begins to feel like a service you’re offering that makes their lives easier and simpler.” What’s somewhat unusual is that the Westpac made an equity investment to build this new capability, then moved the senior merchant payments team to Assembly. “They resigned form Westpac. They’re now Assembly employees, with an equity share ownership plan. They understand bank technology, the processes, governance. They’re embedded in a startup, where they’re free to focus in order to operate.”

Looking more broadly at payments, Duncan said the reason why merchant payments are so important is not that there is much money to be made. Instead, payments have been the hook to hold the deposit. “The deposit is the heart of what supports a bank. You can be the best lender, but if you can’t fund your book, you don’t have a bank. It is essential for banks to be the main financial institution for their customers. You need to provide services that are relevant to your customers.”