Collectively, banks have always done a great job of defending their customer bases. As yet, there is no equivalent in banking to what Amazon did to the book industry, or how Uber revolutionized the taxi industry. Banking has some unique characteristics — in terms of balance sheets, for example, or regulatory requirements — but the incumbent players have also done a good job of appropriating new waves of technology at roughly the speed that customers’ expectations have evolved.
Those of us who have a professional interest in the fintech space are much more likely to decry the pace of change than the average customer, while the typical retail banking experience of today is totally transformed compared with a decade ago.
However, there are good reasons to think that the banks’ ability to manage expectation will disappear. One is regulatory: During the financial crisis, the main regulatory impulse could be said to have been to safeguard the banking industry. In the aftermath, regulators are more interested in breaking the industry open. The U.K. has been consciously encouraging new competitors by streamlining the licensing process. The EU is mandating third-party access to accounts as part of the second Payment Services Directive, which will debase the value of existing customer relationships and also force banks to build external API strategies, more or less for the first time.
And the growth of APIs, heralding the new digital ecosystem, calls into question the way banks have always been able to marshal customer expectations and steady technology improvements in the past. Deploying IT horsepower to replicate developments happening elsewhere, or buying in particular capabilities, is looking unsustainable in a world where innovations can be scaled much more rapidly and cheaply, thanks to a combination of cloud computing at the back end and mobile distribution at the front. And APIs allow non-bank players to combine and develop new value chains in ways that could potentially exclude banks from many of their traditional activities.
A couple of findings from the recent survey we carried out with SAP suggest that banks have not fully woken up to this new reality. When asked for their views on fintechs, fully half of banks are either looking to compete with them directly or acquire them to bring their IP in-house. Only a third of respondents viewed fintechs as possible collaborators.
Moreover, the survey showed that banks are still keener on cutting the cost of delivering their existing product sets than exploring new business models. So banks still believe they can compete with the digital business models of new entrants without fundamentally overhauling their own strategy.
The number of banks that are considering either moving into non-banking areas, white-labeling their services to non-bank players, or creating exchanges to bring consumers and other service providers together is smaller. But it is these strategies that will safeguard banks’ relevance in the long term, with banks not so much competing directly with fintechs and digital players but engaging with them and working out how to join the digital ecosystem from a position of strength.
One interesting example of how this could work in future comes from Canadian bank ATB Financial. ATB brought together its major technology partner, SAP, and the fintech startup Ripple to make an instant cross-border payment to Reisebank in Germany using Ripple’s blockchain protocol, an in-memory computing platform from SAP, and a payment engine. The proof of concept for this technology took just nine days to deliver, and the eventual result was a payment that took 20 seconds to settle rather than the few days of a typical cross-border payment.
Bringing together a tech giant, an incumbent bank, and an innovative startup demonstrates how each of these parties can collaborate to thrive and drive innovations in a way that gives the fintech reach and the financial institution an improved service proposition, in a time span that would be impossible in the old, pre-digital world. This is surely a sign of things to come.