With emerging Fintech services taking the world of finance by storm, it might seem like banks are in for a struggle. If customers grow to expect the same level of agility and innovation from them as from Fintech startups, incumbent banks will either have to find ways to build new solutions more quickly, or partner with companies that will do so for them.
Though this prediction seems to spell out the slow downfall of traditional financial institutions, banks’ have major advantages that are likely to keep them relevant: stability and system efficiency, access to large amounts of customer data, strong customer base, vast experience in a highly regulated ecosystem. Let’s take a look at what staying competitive will have to mean for banks in the near future, and why Fintechs can’t replace them.
Banks vs. Fintechs – different ways of innovating
Fintechs fill a specific gap in the market – one left open by how slowly traditional banking changes. The main goal of these disruptive companies, and their drive towards innovation, is leveraging technology in order to meet the financial needs of customers and deliver experiences that can’t be found elsewhere. Banks, on the other hand, need to cater to a wide audience to function – their offers can be varied, but not niche – and a major concern of theirs, due to the critical role of banking, is risk management.
Historically, banks have lagged behind Fintech companies in terms of personalization, customer experience and innovation. They are highly regulated institutions which provide stable, trustworthy services via a resilient business model. They are necessary to economic growth and the proper functioning of many modern societies. The Fintech industry rarely chooses to compete with that, and instead shifts focus to other areas, such as mobile experience, accessibility, contextuality and convenience. Their rising popularity is pushing customers’ preferences towards mobile banking and personalized finance solutions.
A notable advantage Fintech companies have over banks is accessibility in areas of the world where mobile devices are the more common device among users. According to Analytics India Magazine, mobile penetration reaches 80% in their country, while banks stagnate at only 35% distribution. One work-around to this problem applied by banks has been partnering with Fintech startups to reach otherwise unreachable user groups.
Fintechs, with their flatter organizational structure, ability to pivot and iterate, and ease of adopting new technologies, may seem to be at a clear advantage compared to banks. They can target niches, personalize the experience they deliver, and remain relevant as technology trends and user expectations change rapidly. However, it is unlikely that they will come to fully replace banks, or even threaten them in a major way.
One way in which banks can keep moving forward without spending too many resources is open banking. This approach allows third parties to develop services and products around the offer of a financial institution, by using an open API. While this raises some questions regarding security and data privacy, it’s an approach designed to drive innovation and improve customer experience. ING Bank is one well-known institution that has taken steps in this direction.
Why banks are in a strong position on the financial market
Deep industry expertise allows banks access to information and know-how that Fintechs simply don’t have. On the basis of that knowledge, banks can make efficient and effective choices when they apply new solutions – and they have been very open to exploring the potential of modern analytics, AI and machine learning.
Additionally, when internal innovation seems like the wrong path to take, banks have the power to partner with or even acquire Fintech startups and enhance their offer in this way. Banks have been dipping their toes into solutions for personal finance, wealth management, innovative lending, various payment options, blockchain, and more.
The major challenges banks face today
Due to their nature, banks must push past legacy solutions and complex regulations to innovate. This makes them slower to react to emerging challenges, and prevents them from taking advantage of emerging technologies. Additionally, accumulated legacy assets might become an unhelpful burden that drains resources and produces little value.
From a marketing perspective, banks rely on their reputation and the trust they’ve built with their customers. They need to manage risk very carefully. From a hiring perspective, banks need to start worrying about what process automation will mean for their hiring criteria. According to McKinsey & Company’s research, 43% of bank working hours can (and likely will be) automated using currently available technology.
Switching to a hiring mindset focused on quality and socio-emotional skills will mean restructuring internal hierarchies into flatter, more agile ones. Powerful data analytics will allow HR departments to not only hire the right people, but also to identify problematic areas within their structure, such as ones with a high attrition rate. The results of this should include improved overall efficiency and faster decision making.
Overall, the Fintech disruption is forcing banks to take on a more customer-centric approach. Users now have the tools to pick and choose, and they are often happy to look into available options, regardless of whether those options come with the backing of a traditional financial institution. Reports indicate that 50.2% of global banking customers use Fintech solutions.
Although Fintech companies will not take over the market by themselves, banks are faced with a choice between matching them in innovation or partnering up with Fintech startups to remain competitive. Crucially, emerging markets adopt innovative solutions most easily (the rate is 84.4% for China, and 76.9% for India). As future population growth is likely to be limited to just these markets, it’s one area where banks might face direct competition from Fintech companies.
How banks will drive innovation
The fact that banks will need to adapt to face the future is not in question. According to Forrester’s insights, banks will have to change in four major ways over the next decade. They will need to become invisible through deeper customer insights and analytics. This means using data to approach customers at their exact time of need, and across multiple channels, including smart homes and vehicles. Lowered brand visibility will be a major cost of this shift.
One interesting example provided by Jacob Morgan, Senior Analyst at Forrester, compares future banking solutions to what Tesla does with cars. According to Morgan, “autonomous finance” might replace the concept of having a bank account. Instead, a new solution will manage users’ cash flows and financial relationships – optimally, largely through automation. With the addition of the Internet of Things, transactions could happen without users’ input. A car might barter with sensor-driven data for better deals on various services.
Banks of the future will need to be connected – present and relevant to customers as they navigate daily life. This will require partnerships with external service providers. Though distributing their delivered value in such a way may seem dangerous, it will result in a frictionless customer experience. Banks will be driven to focus on becoming trusted advisors in the eyes of users, to differentiate themselves on the finance market.
The future of banking will involve powerful insights, based on data acquired thanks to relationships of deep trust built with users. Banks can already become guarantors of online identity for users, and this role might expand over the next few years. This relationship, based on user consent, will only be possible if banks offer financial intimacy and personalized advice to make trusting them worth it.
Finally, banks will need to be purposeful in the actions they take and the values they represent. Customers are increasingly conscious of the impact their actions have on the world around them. Their support of environmental and social causes is becoming part of their identities, and as such cannot be overlooked. Banks will need to cultivate cultures of openness and responsibility, curating their communities as an additional delivered value.
Is there still room for growth acceleration in Fintech?
The fact that the word “fintech” usually brings to mind startups is telling. So far, they have ridden on the wave of user dissatisfaction created by the dated infrastructure used by traditional banks. This has a major disadvantage. Fintechs are themselves limited by what banks are doing – it’s impossible to fully step away from the legacy infrastructure and assets.
Of course, banks are likely to innovate at their own pace and improve the situation eventually. In addition, their cooperations with Fintechs (according to Toptal’s data, 63% of banks invest in startups or set up accelerators) might become more reciprocal over time. On the other hand, banks have the power to limit growth in Fintech if that proves more advantageous.
In fact, some industry experts suggest that banks should do just that. The idea is that banks have the capability to take over innovation within the finance sector – in such a scenario, Fintech companies simply aren’t necessary. However, it’s difficult to predict which model (internal innovation or partnering with Fintech companies) will prevail. For the moment, Fintech is doing well – research values the global Fintech market at $127.66 billion in 2018, and predicts a growth to $309.98 billion by 2022.
Why the future belongs to banks, and not fintechs
Simply put, banks know what they are about. With their level of expertise, they can apply vetted technologies to build solutions tailored to their processes, and keep all generated value. According to Simon Moss from TechCrunch, challenger banks might be the answer to the stagnation in traditional banking. Using the best of both worlds, they can achieve incredible results. For example, take a look at Vivid, which uses the infrastructure of Solarisbank and provides customers with a broad range of services, such as sub-accounts called pockets, or a cashback feature.
Meanwhile, traditional banks are investing in data science and analytics. They have the advantage of a much larger pool of resources to draw from, compared to challenger banks or Fintechs. They may be moving slow, but the goal is to retain the competitive advantage, instead of sharing it – which would be the case for any solution relying on an easily accessible data lake. If banks go through restructuring for added agility, and if new regulations and standards work in their favour, they could easily become powerful drivers of innovation on the market.