In 1903, United Kingdom Member of Parliament (MP) Mr. Scott-Montague said, “I do not believe the introduction of motor-cars will ever affect the riding of horses.” We all know how that panned out.
The initial reactions of banks toward fintechs were similar.
According to Accenture, today’s fintechs, big techs, and other challengers have gained one-third of new revenue at the expense of traditional banks. And according to KPMG’s Pulse of Fintech 2018 report, total investment activity in fintech, including venture capital, private equity, and mergers and acquisitions, increased from around $19 billion in 2013 to about $112 billion in 2018.
This data indicates that interest in fintechs – and the threat from them – is real and current. If the threat is neglected for too long, Bill Gates’ ominous 1993 statement – “Banking is necessary, banks are not” – could come true.
The constraints of traditional banks
Banks have their own strengths, including being in the business for centuries and having associations with and access to customers and their data. But they are hamstrung by legacy systems, stifling regulations, and an inability to explore the true potential of emerging technologies due to lack of expertise and cultural inertia regarding change.
For the same reasons, banks are plagued with inefficient delivery systems, which leads to huge cost and associated dissatisfaction of customers. Their inability – and to some extent unwillingness – to explore emerging technologies has resulted in lack of innovation. Accordingly, they lag fintechs in coming up with new products and services, capturing new customers, and creating new markets and customer bases.
Fintechs: Modus operandi and strengths
- Disentangle the web of core functions of financial services
- Use emerging technologies to address inefficiencies of each core function
- Use innovation to improve products and services at low cost and lure customers away from banks
- Keep the customer experience at the center of all strategies
Unlike traditional players, fintechs are unencumbered by most government regulations and legacy infrastructure, which helps them keep their processes agile, lean, and efficient. They are better at leveraging emerging technologies to create innovative products, services, and ways to interact with customers, and consequently provide a delightful experience. The result? Customers are moving away from traditional players and toward challengers.
Fintechs also keep their customers at the core of all their strategies and incorporate emerging technologies into their culture.
To offer a loan, for example, traditional banks require lenders to provide documents such as salary paystubs, bank account details, credit histories, etc. In contrast, startups such as Branch International use analytics based on digital footprints to process loans. This approach enables them to tap into an entirely new market of customers, including those who may have been unable to access credit from banks due to lack of documents.
Similarly, M-Pesa makes use of mobile technology to help people deposit and transfer money by simple SMS or message. This spares customers the hassle of visiting a bank branch, opening an account, and performing transactions.
Similarly, Clover Health uses customers’ data to predict and prevent emergencies and improve the health of both the insured and the insurers. Meanwhile, Kabbage provides automated lending to small businesses, and Apttus uses AI to ease the sales contract process.
Using a customer-centric approach and emerging technologies, fintechs are able to improve internal processes, offer financial services to unbanked and underbanked customers, and provide customers with an entirely new financial service experience.
From confrontation to collaboration
However, not all is rosy for fintechs and thorny for banks. Even as fintechs continue to make inroads, banks are starting to wake up and protect their turf. And fintechs are facing their own challenges, including funding, scaling up, and accessing customers.
Confrontation is costly, so traditional banks and fintechs are starting to form alliances: Banks, for example, offer budgets and customer access and data, while fintechs bring culture, drive, ideas, and tech savvy. This type of collaboration is a win-win, helping banks acquire new technologies and create new products, solutions, and services while fintechs benefit from access to customer data, which they can use to improve their products and provide better services.
Banks are also pursuing collaborations with integrated platform providers, which help them implement emerging technologies to improve legacy infrastructure and ultimately offer new products, solutions, and services. They are also helping them transition smoothly from legacy systems to new infrastructures. Such partnerships are helping traditionally technology-averse financial service organizations become technology-enabled intelligent enterprises.
If traditional banks and fintechs continue to collaborate, they can build an ecosystem of intelligent enterprises with improved infrastructures, and offer customers better products, services, and solutions. That would turn the siege into a friendship that would benefit everyone.
For more on tech innovation in the banking industry, see “Biting The Hand That Feeds.”