Traditional banks are experiencing a period of unprecedented disruption driven by an evolving customer base, demands for new services, and new technology that makes these services possible. Tech-savvy fintech firms are emerging to serve rapidly evolving markets for financial services and garnering large sums of venture capital in the process. How established firms respond to the challenges posed by the fintechs could be crucial to their future success and, some would argue, their very survival.
Over the last century, banks have acquired a lot of baggage. They are highly regulated. They are often saddled with a legacy IT infrastructure that lacks the flexibility they need to respond to changing market conditions, as well as a physical infrastructure of branches that some studies suggest are becoming less and less relevant to today’s customers. A 2019 study published in The Financial Brand found that "38% of consumers now feel brick-and-mortar interactions are no longer necessary while 37% believe in-person banking still has value."
An even more significant challenge is the culture of banking. It is tradition-bound, and in large measure still centers on the management of assets, lending, interest rate spreads and regulatory compliance, as opposed to customer service and delivery channels. This focus is changing. According to a 2017 survey (via PR Newswire) my company and Efma conducted of over 300 bankers, retail banks are spending more on innovation in customer experience and channels (both at 78% of respondents), products (67%), process improvement (64%) and marketing (57%). According to a 2017 McKinsey report, two-thirds of leading global banks allow customers to open deposit accounts through their mobile apps. According to data from Finalta (via McKinsey), the number of active mobile-channel users at U.S. banks increased by about 25% per year between 2013 and 2016.
However, when it comes to change, the fintechs have important advantages. Their infrastructure is fresh, as it is generally built from the ground up to leverage the benefits of cloud computing and to address customer experience factors like mobility and voice user interfaces. They typically concentrate on single functions that can be highly lucrative, such as payments, digital wallets and lending, or on services that most banks don’t provide, such as budgeting apps. They are relatively small and therefore nimbler than the incumbents. Finally, their cultures are often more focused on their customers and how to best meet their needs than on asset management and regulatory compliance.
How can traditional banks compete against this onslaught of aggressive, nimble and well-funded startups? The answer may be not to compete at all. To flourish in this new environment, I believe the best path for incumbents is to adopt a platform-based business model. In this model, the bank can become both the financial and technological foundation for a flourishing ecosystem by aggregating services that deliver the positive experiences customers want. The platform model makes sense for several reasons.
Despite the shadow that the financial crisis of 2008 cast over the major banks, they still have a huge customer base and market share by assets, one that likely dwarfs even the most successful fintechs. They are still perceived as the logical starting point for many consumers who have new financial needs. In fact, nearly 80% of the 1,250 respondents to a 2019 survey from my company considered the bank of the future as a marketplace to cater to all financial needs. The platform model would allow banks to make this vision a reality and to continue delivering a unified banking experience that includes human touch points that fintechs don’t always offer.
From an IT perspective, I believe open application programming interfaces (APIs) are a crucial enabling technology. APIs are not new. They have been used to connect applications to each other since before the turn of the century. Until recently, however, they have typically been built one by one to meet a single specific need. Open banking APIs I've worked with are standards-based and designed to make it easy for fintech developers to integrate with the IT systems of major banks, even when those systems are based on legacy mainframe technology.
Nontechnical bankers should be aware of these connectors because they enable the sharing of customers’ financial data, and therefore will require mechanisms to ensure that consumers can maintain control over their personal financial data.
To return to the big picture, it’s clear to me that fintechs are here to stay because they are a primary source of the technology necessary to deliver the services that today’s customers demand. But banks should not perceive them as competitors.
Rather, by adopting a platform-based business model, banks can capitalize on fintech’s technological expertise through partner relationships. This would allow banks to modernize and hold their position as a single source for financial services while providing fintechs with a customer base that would otherwise be difficult and costly to acquire. It’s a win-win proposition.
