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Gábor Pozsonyi - Why incumbent banks will prevail over fintechs

10 minutes reading time

 

Gábor Pozsonyi is a firm believer in the Impact Revolution. With a background in banking, corporate finance, and financial institutions advisory since 1991, he has made big values-driven career moves.

He served as corporate finance advisor in Eurocorp, EBRD’s corporate finance boutique; as strategy director/investor relations head of OTP Bank; then he joined KPMG CEE Financial Institutions Advisory Services as Senior Manager in 1997. In 2003 Gabor joined CIB Bank, a Banca Intesa subsidiary in Budapest as Managing Director. 

Gábor then joined PortfoLion Venture Partners as Investment Director for PortfoLion's Digital Fund. Starting in 2022, he joined Banca Ética Latinoamerica as Director of Digital Technologies and Products.

It is not often that I meet a banking executive, who can say that they have not only traveled the world as a banker but also managed to spend time in the world of venture capital. How did you get to this point in your career?
 

I spent more than 20, actually 30 years in banking, mainly in retail banking, I graduated in 1991 in Budapest as a financial economist, started working in banking, then I left banking and became a partner at KPMG, and then I busied myself at financial institutions and advisory services in Central and Eastern Europe, shuffling between Moscow and Vienna. And then I went back to banking as a managing director of the Hungarian subsidiary of Banca Ética, the Italian bank.

However, the most important experience in the last 30 years, was the eight-year stretch I spent building a values-based or impact bank in Hungary, a small bank with a values-based strategy that invested and financed socially and environmentally impactful projects.

And while I was working there, the bank became a member of the Global Alliance For Banking on Values, which is an alliance of banks from all over the world that is pursuing a strategy around sustainable economic, social, and environmental development.

It sounds like you started in a values-driven bank that even had an investment thesis based on this, pretty early in the game because, of course, now we hear a lot of discussion about ESG. How did you make that jump? 
 

Yeah. I would be happy to say it happened because of the value systems that I had. I was at a point where I had enough of the corporate culture and the way of life in traditional mainstream banking. And I was looking for some more humane organization where I could add value as a banker. 

Was it hard to make that jump? 
 

Oh, it was a risky career decision, and also, my ego hurt a bit because of the feedback from my community and friends. Back then, ten years ago, swapping your position in a mainstream bank for a position in a bank with a 1% market share of total assets was unusual. But I didn't really care because I understood that I needed to change my life. 

If you were to propose this switch today in 2022, this is like a fast-growing part of the banking universe - values-driven ESG, socially driven investment funds - it’s quite a mainstream idea these days, but ten years ago, it was far from that.
 

I think that the background organizing theme in my mind was that for many years, I said both money and technology are value-neutral. But for the past ten years, I haven't been thinking like that. I don't think technology or money, for that matter, are value-neutral. 

I even did a Ted talk about it. I need to understand the whys behind every individual action. Why do we buy a particular product? Why do we invest in a specific asset class instead of another or a particular company?

As I spent my last two years in venture capital, I experienced technology investments for the sake of technology investment. And I don't think that is something we should do. I don't think that is personally healthy. At the end of the day, I have two kids, a 28-year-old and a ten-year-old. I want to create hope for them. And I had enough of making money for the sake of making money. I guess that's what I mean.

These big purpose-driven moves in your career, seem to be a constant playbook. Whether it's switching from a traditional bank to values-driven banking or switching continents. How does your family keep up with you, Gábor? 
 

I'm fortunate. To be honest, my wife initiated this change after experiencing a call between Budapest and Santiago last year, then she said, "I understood that you are going to be happy there. So I'm ready to move." I'm fortunate with my family. 

Now that you are starting with Banca Ética, what are the essentials that you need to do inside of an incumbent bank? What do you need to do to set up a growth agenda? 
 

I don't think I can give you a very creative or fancy answer. I think my answer to that question would lead us back to the basics. And not only in banking but, in our society as a whole, and then in every industry, and it has a lot to do with how my values developed. 

Going back to the basics would be clearly understanding the value proposition behind every single product, every single service you deliver to your customers because I believe that most industry players have long forgotten why they are doing what they are doing.

When I started in banking, my first boss told me that I came to the most boring of industries; we only have loans, deposits, and transactions. And yes, it's an age-old profession. But as a basis for growth, I would always go back to the basics and understand the value proposition. What is the real value behind the client experience we so carefully design? 

Are you talking about the value proposition in terms of making sure that it is a competitive product or are you talking more about making sure this helps the customer get the job done?
 

One of the superstar investments we made at PortfoLion, I won't mention the name, hired a new sales executive with tremendous sales experience, and on the very first meeting, he told me:

Gábor, enterprise sales is dead. The product needs to sell itself”. 

That's what I mean by value. Suppose the product doesn't sell itself because it doesn't create any sort of economic value, tangible or intangible, and then you need to use all sorts of sales tactics to grow, that's not a good basis for growth. That's the point. 

The product needs to be so clearly compelling that it almost makes the case on its own. You don't have to do some Blitzkrieg-style marketing campaign; the value it creates in getting the job done for the customer should be so strong and so clear, that it sets the agenda for growth. There’s this great saying that no good advertising can fix a bad product, right?
 

Definitely. When I was at Banca Intesa, I had a discussion with one of my branch managers. We had a new product, some mutual fund product, and the numbers were not good. And we sat down with a couple of branch managers. And then they told me, “Gábor, I have these relationships with a couple of hundred people in my branch. I built my brand based on the honest process of advising them when investing their money. So give me a good product, I will generate growth. But if you give me this shitty nothing, I will not only not be able to sell it, and I will not want it because that would ruin my brand”. You need to have a product with tangible value. 

If I may bring up a story regarding a FLOWX.AI meeting. I sat in one of their sales meetings, facing a customer, and FLOWX.AI was presenting what they could offer to a bank executive. And after 20 minutes, the executive said: 

If what you're saying is true, then this is a thing we badly need. So the next step is due diligence, and I will spend time and money on understanding what your product can do. If it's there, then we need to have it.

So in terms of delivering value, that's what I mean by having a product that is actually so good that it's almost unbelievable. 

Too good to be true, but it actually turns out to be true. That's almost the twist, isn't it? 
 

Yes. And if I can add a little bit of a macro perspective to this, I believe that in the past two years of monetary easing and in a situation where we swim in money - this money can flow to stupid, zero, or negative value technology propositions and products that will turn out to be irrelevant. The job of a venture capitalist becomes actually more difficult in these monetary easing times because when you have an incentive to spend money, you will make more mistakes in predicting the future than when you have scarce resources.

And particularly with inflation coming, I think there'll be even greater pressure to deploy capital and get that return. This brings us now to some of the dynamics in the marketplace that we mentioned. The new offers, the new competitors, the fintechs, the neobanks, and so on. And what gets left behind or left out of the conversation is what do traditional banks have to offer the world?
 

I would start by telling you that I'm a bit disappointed with the magnitude of disruption Fintech brought to the table in the past couple of years. There are areas where Fintech companies improved the customer experience tremendously and posed a real challenge to the incumbent banks, but if we separate the payment function from the intermediation function and define the banking business as a combination of the two, I think the Fintechs disrupted more the payment function and did very little on the intermediation function.

I think there's quite a big insight. You're almost saying that fintechs have come along and disrupted transactions. But when we talk about advisory, when we talk about risk management, actually their role and disruption have been really insignificant.
 

Yes. That would lead me to answer your question of what the incumbent banks have and what the fintechs don't. And I think they have a number of things: they have an age-old understanding of credit risk, the data, the processes, the mindset, and the people. And this is not applicable to just banks per se, but the whole ecosystem including regulators, credit bureaus, and so on. 

So I think the core function of a bank -  namely, credit risk management - is still performed much better by the incumbent banks rather than by Fintechs. 

Correct. And we'll certainly see how things go. As some of these Fintechs actually do acquire banking licenses, giving them the opportunity to play in this game.
 

It's almost a paradox - you have a bunch of disruptors and revolutionaries who, after a number of years finally apply for a banking license. 

So, that would be my first comment. The Fintech world has not lived up to the challenge of disrupting the financial system of the planet. And the incumbent banks have this age-old experience in credit risk management. They also have this protecting fence of regulation. They are protected as they are regulated, and obviously, they have huge resources. They are sitting in a talent pool. They are sitting on money. They are sitting on a huge pool of customers.

This large customer base together with the regulatory protection and expertise in the basic functions of financial intermediation - these are all resources that give incumbent banks the real resource - time. So they have time to actually develop a digital customer experience, that is similar or even better than that of the Fintechs. 

 Just let me give you an example. Based on a regulatory initiative, incumbent commercial banks introduced instant payments in the retail payments arena. Now, if I have an account with an incumbent bank here in Santiago de Chile and want to send money to my father back in Budapest, who has an account with a different incumbent bank, I push a button on my mobile app. The app gets that money converted and delivered instantly. Do I really need to have an alternative solution to send money home? 

That example that you're giving is about real-time payments, which is just a proxy for this whole question of speed. How do we move at speed? Knowing that as a traditional bank, you do have a legacy technology reality. There is still way too much COBOL out in the world for us to deny that there is a constraint there.
 

Good question. I would first elaborate a bit on the notion of speed and growth. I think what we are really doing is just a buzz. So I wouldn't necessarily accelerate things without actually thinking about the right rhythm of doing things.

So the theme is actually velocity, which is the combination of speed and direction rather than just speed itself?
 

Right. And also another thing, which is the lack of direction. Serban, the CTO of FLOWX.AI, has a nice saying “slow is smooth, and smooth is fast”. And I do believe that you need to do a fair amount of deep-focused thinking before you push the gas pedal. I was with KPMG when the tagline of KPMG was “cutting through complexity”, along the lines of getting back to the basics. 

So dealing with legacy technology would require cutting through complexity, but not the complexity of the tech stack and the architecture. That's complex and convoluted, yes.

But I think cutting through the complexity of the technical architecture is two orders of magnitude easier than cutting through the complexity of the organization, the relationship between stakeholders inside and outside of the organization.

In many cases, there are super new and super creative technological solutions like FLOWX.AI. But pushing these through an organization with so many diverging interests, opinions, and understanding of issues is really hard. In many cases, I believe the sales process is nothing else than educating the client.

In fact, also in venture capital, we don't really know; we simply don't understand the technology. We are talking about technology using buzzwords, but the decision-makers who sign the checks simply don't know what they are talking about in many cases. 

Would you say that a lot of people are lost in complexity? 
 

Yes. Another thing about the basic things: there are people within organizations, not just banks, doing what would be called a low-level engineering job, doing busy work. We have to stop thinking about organizations as rational, as a set of rational decision-makers. Unfortunately, we don't do that. That's my experience. And we assume that the other guy wants to find a solution for this technical problem and wants to accelerate. No, that guy wants to keep his job as an engineer by minimizing the effort he is putting into that. If he doesn't understand the value and the purpose his organization is working towards, he just wants to survive and go home at six in the evening. 

What strikes me is that you are bringing our attention back inside of the organization, back to the individuals, understanding their motivational drivers in their alignments. But you are also on the external side of things, making sure that the product's value speaks for itself. 
 

Exactly. And probably going back to your question of what are the essential requirements for growth in banks, I have a pretty clear view on that: that is good customer service.

Good customer service can be achieved by constructively breaking the rules of the company, the bank, the business model by humans. And that’s something technology cannot do. I don't want to go into what AI can do, but I think good customer service is being delivered by people who now and then break the rules of the business for the benefit of the customer.

And I would challenge this whole net promoter score thinking behind it, which says if you meet the expectation of your customer, that’s good. It doesn’t matter. That will not lead to growth. What leads to growth is a positive difference between those customers who are getting more than they expected.
 

What technology can deliver in a very constant way is the experience you expect. But that's the baseline. Now, if you have a financial institution with digital technology in the background that is almost invisible, that would serve 90% of your customers. But the growth will be generated by technology-enabled people who can break the rules.

The most important customers you have, are those who are complaining. And if that complaining customer can speak to a human being and get her problem solved, not by a chatbot, but by a human being who can break the rules constructively, then you created a lifelong customer and promoter, and that's the basis of your growth. 

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