Fintechs push banks to digital ecosystem

The pressures and challenges facing the banking sector are real. The hard truth is that a number of banks may struggle to remain in business, unless they make a definitive change in direction. But let’s be clear: those banks struggling will not be doing so as a direct result of financial technology companies (fintechs) displacement.

Historically speaking, technological disruption has not been the cause of bank extinction. However, banks have reached a tipping point. They must accept that ‘business as usual’ is no longer a sufficient business model in a digital financial ecosystem that is evolving with increasing rapidity.

Over the past year, many financial institutions have finally experienced a light-bulb moment. According to the 2016 World Retail Banking Report (WRBR), jointly produced by Capgemini and the European Financial Management Association (EFMA), 90% of banking executives interviewed said they believe the industry is witnessing an accelerated pace of change.

A mounting wave of increased regulatory burdens, accompanied by rising customer expectations, the acceleration of technological advancements and now fintechs chipping away at market share have all led to the current state of play.

Competing priorities

Banks have traditionally been fixated on compliance obligations over the past decade. With a large share of time and budget allocated to staying ahead of regulations, they were less focused on meeting customer expectations – never mind exceeding them. The challenge is summed up by a stark statistic: three out of every five dollars of bank spend is being used to address regulatory and compliance concerns.

However, this mindset has changed in recent years as banks in Europe have been forced to prioritise customer experience. As a result they quickly shifted into reactionary mode, attempting to win back customer trust and loyalty, while continuing to combat an inordinate and complex volume of regulations.

This is the main reason why executives have started shifting some of their focus and investments to additional core areas.

Customers’ expectations are setting the pace

Customers were not only looking for banks to earn back their trust and to increase transparency, they also demanded the same easy, transparent and frictionless experience they get in their day-to-day activities from technology companies such as Google, Amazon, Facebook, Apple and Uber.

Having become used to a seamless experience from such companies – one that blends the physical with the mobile and digital world – customers inevitably ask why they can’t receive the same from their banks. The clunky systems banks have depended on not only hold them back from delivering on this experience, but serve to highlight how little a consumer’s bank knows about them.

To compete and win customers, banks need to find better ways to deliver against evolving expectations, while manoeuvring through legacy technology. There is a careful balance that needs to be struck to deliver a more digital customer experience; in particular more personalised advice and products. Not only will this help attract and retain customers, ultimately it will lead to increased revenue and profitability for the banks.

Technology continues to be a challenge

Of course, the barriers to achieving these goals are significant. Not least among the difficult decisions facing banks is the fact that technology continues to evolve at an unprecedented, dizzying pace, with a huge range of solutions and strategies available that makes selection a challenge. This pace of change is also producing threats to incumbent banks’ dominant market position. The expenses of building new technology solutions have reduced and the advent of cloud solutions has made it much easier for new entrants to roll out innovative solutions to the market at very low cost.

Most importantly, emerging fintech players don’t have the legacy core systems and siloed, fragmented organisations to hold them back and slow them down. By contrast, 87% of executives who participated in the 2016 WRBR said that their core systems weren’t sufficient to handle this pace of change and sustain the evolving digital ecosystem.

Increasingly we see banks putting strategies in place that will eventually enable them to compete, albeit slowly. However, many are quickly recognizing that they may be unable to service the full suite of customer needs on their own.

Nearly all (96%) banking executives believe that the industry is moving toward a digital ecosystem. This is one where all players operate in a partnership model, with banks making strategic investments and partnering with fintech firms to develop innovative offerings.

Are banks really ready for a paradigm shift?

The current financial ecosystem is broken. The transition to a more innovative, customer-centric, and collaborative model is not going to be easy for incumbents. However, it can no longer be a question of whether banks are ready, but when. If their response is too slow, they may find themselves as the challenger brand in a market dominated by more agile fintechs.

As the WRBR reveals however, the industry need not split itself in a damaging battle between incumbents and fintechs. The business benefits of partnering to achieve positive business outcomes exist for both parties. Banks have their large customer bases, legacy expertise and established relationships with regulators, while fintechs offer the ability to move nimbly to innovate and leverage technology.

As always, there will be sceptics who want you to believe that this is just a transient phase for the industry and that once it understands and integrates a host of new technologies, the market will essentially continue as it has for decades. While it’s true that we’re in a transition phase, it is important to realize that the industry now operates in a new reality. This reality is a digital one, characterised by rapid change and constant evolution. Transition is now the status quo, not a phase.

For those banks embracing change, this is a positive thing. It is only through sustained digital disruption that banks can provide the level of service, experience, and offerings that customers are increasingly demanding – to meet not only their current needs, but those of the future prompted by technologies that haven’t even been conceived yet.

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