In Part 1, I discussed the views of Fintech startups that ask “How can I transform this financial process using technology?” Banks think differently, asking instead “How can I apply technology to this financial process?”
The main difference is that banks think Techfin rather than Fintech. They begin with their existing operations and explore how to improve those operations with technology. It’s a mindset that works differently in different markets.
For example, an investment bank in capital markets or a prime broker would be far less fearful of ditching existing technologies and reinventing their operations than a large retail bank. This is not surprising, as investment banks compete in a very cutthroat marketplace where technology has been the competitive differentiator for some years. Consider the rise of high-frequency trading using low-latency technologies; you will see a completely restructured capital market that has been transformed by technology in the last decade. Compare this with a large retail bank with millions of customers, whose primary focus is safety, reliability, and stability, and you can see why retail banks are stuck with legacy technologies whilst their investment bank counterparts are running at light-speed.
So you cannot view the banking marketplace as a homogeneous structure. But at a high level, it is certainly true that investment banks think more like Fintech firms than retail or commercial banks. Most large retail commercial banks face a challenge that is very different from those faced by Fintech firms and their investment counterparts: How do you transform a business where the customer expects no risk and minimal change?
This was illustrated in a conversation I had with a digital bank leader, who explained that each time they change their mobile app, they get more complaints from customers than compliments. Customers don’t like change, especially in their bank. Change implies risk, and risk should be avoided for both the bank and its customers. Banking customers are generally reluctant to switch banks, and they do not expect their banks to switch their own systems. When banks change their website design, add more mobile functionality, or restructure the operations, if these changes are visible to the customer, they cry “Foul!”
This is why so many retail and commercial banks face negative publicity when they close a branch, charge a fee for improved service, or upgrade their systems. Any fault, glitch, or failure gains headlines of gloom. Any downtime, lost transactions, or missed payment results in regulatory review.
Hence, Techfin firms must focus upon technology improvement rather than total transformation. Techfin firms should not think like Fintech firms, because their customers don’t want them to. This is why Techfin firms – the incumbent banks – are neither dinosaurs nor technology deniers, but purely pragmatists that are improving their operations with technology rather than trying to disrupt and transform them.
For another perspective on how fintech is affecting traditional banks, see Time For Banks To Fight Back.