How fintechs and banks are transforming each other | Aug18 Newsletter
The once-traditional financial services industry is undergoing radical and rapid transformation thanks to the disruptive emergence of fintech (or financial technology): technological innovations in the finance sector affecting areas as diverse as retail banking, capital markets, asset management, financial advice and payments, to name only a few.
Fintech startups – more technologically and structurally agile and customer focused than their incumbent finance sector counterparts – are transforming financial services and the ways we use them. But what are the costs, and benefits, for the industry incumbents and for consumers?
This blog looks at the strengths and weaknesses of both sides and suggests how technology and collaboration can act as a transformative bridge between traditional banking and fintech companies to give us more choices, and make our lives easier.
Banks in danger?
When you think of banks and the role they play in your life, organisations such as PayPal, Apple or Google don’t necessarily spring to mind. Yet technologically innovative companies such as these have eroded the banks’ traditional stranglehold on payment systems.
Through technological innovations such as blockchain, data analytics, automation, AI, cloud computing and other mobile technologies, fintech startups have disrupted the banks’ historical grip on their customer base and the attractiveness of their product offerings.
Banks versus fintechs: The benefits
Traditional financial services organisations and their offerings are broadly characterised by:
Stricter legal and regulatory compliance mechanisms.
Greater data/IT security.
A well-established suite of product offerings geared toward retail as well as business consumers.
A large, established customer base.
While their fintech competitors offer:
Tailored or ‘unbundled’ lower-cost product solutions (such as ‘robo-advice’, where technology, rather than a human advisor, is used to generate financial advice).
More targeted, user-friendly customer service/interfaces.
A leaner, more agile organisation.
Non-traditional offering channels (e.g. 24/7 access to payment systems via mobile devices or web-based applications or Peer-to-Peer (P2P) lending platforms that can assist those who are otherwise unable to access loans or banking services through traditional avenues).
Banks versus fintechs: The Disadvantages
A large proportion of the world’s population is ‘unbanked’ – that is, unable to access traditional banking products or services because of factors such as poor infrastructure or a poor credit history. And banks have traditionally been unable (e.g. through antiquated systems, structures or technology) or unwilling (due to perceived risk) to capture this vast market.
Along with this loss of market share to non-bank players, banks are also suffering from a loss of brand awareness (particularly among millennials), even as their reputations are suffering from scandals and other ethical problems. Combined with increased unbundling of their services and greater commoditisation as consumers are better able to compare different services and providers with greater transparency, there may be problems ahead.
Fintech organisations and offerings, however, carry their own risks. Thanks to their fast growth and technological change, not to mention their ability to avoid some of the regulatory complexities facing the banks, there can be the potential for significant loss to end-users (e.g. through data breaches or cybercrime).
A new approach to finance
It’s not all doom and gloom for banks. Commentators have noted that the two sides will enjoy a ‘win-win partnership’ where there is direct collaboration across the financial services landscape.
The biggest risk facing banks currently is that of inaction, Forbes commentator Martin Haering notes. Banks need to take their expertise in risk management and regulatory compliance and marry that with their fintech competitors’ ability to “delight the customer”.
On the flip side, fintechs that better focus on financial stability and consumer protection issues (things the banks have traditionally done well) are likely to offer an even better customer experience for their users.
We’re already seeing new services and business models emerging, including:
Merging fintech product design and development capabilities with the distribution and structural capabilities of banks.
The rollout of open banking in Europe and the UK.
Investment in fintech companies by banks.
Banks embracing open API banking to enable more seamless access to third-party, value-add products through a single interface.
The key to all of these is a focus on the customer and the customer experience combined with a clear view of the strengths and capabilities each side brings to the table.
Collaboration is the future
In an era of staggering, technology-driven transformation in the financial services sector, customers – and the banks and fintechs themselves – can only benefit where banks and fintechs learn from, or collaborate with, each other. We can’t wait to see what the future brings.