By Nicolas Pocard for Finextra
The global financial crisis inflicted a lot of pain on most banks. Strong antagonism between Main Street and Wall Street coupled with market crash aftershocks left these traditional portals for money management crumbling with disappointing end-of-year financial statements, dissatisfied shareholders and disillusioned customers.
Since then, the emergence and proliferation of Fintechs, cherry picking each banking services – payments, trading, lending etc. – and digitizing, refining, improving but mostly cheapening them was seen by many as the “coup de grace”.
The rise of the Millennials fueled with mistrust for the traditional financial institutions-considered useless and disposable middlemen-led 83% of financial services professionals indicating in a PwC survey in 2015 that they were concerned about losing business to new Fintech startups. Citigroup even considered Fintech on the cusp of an “Uber moment” changing the industry irreversibly.
Although banks cannot make money from business as usual anymore, one needs to realize that banks aren’t going anywhere. There is a saying in the industry: if you’re betting on Fintech, you’d be wise to remember that the bank is the house. You might have a few wins here or there, but in the end the house always comes out ahead.
The Fintech challenge to banks is not one of “surrender or die” but more “adapt not to miss the wagon”. Fintech is an amazing incentive and opportunity for banks to improve their service, to acknowledge and to fill the changing demands of their customer base. Let’s not forget that Fintech has been around since the 70s and these challenges forced banks to go the extra mile and give us ATM’s, payment cards, POS.
So how do banks cope with the new waves of Fintech?
The first approach comes from introspection, banks adapting slightly their own DNA to come up with a hybrid challenger bank with low levels of integration with its parent. Freer means faster and more successful. Still building something new with something old won’t cut it with a customer base craving a transformational tech experience. Moreover from the bank perspective, the willingness to outperform every competitor will be impossible to implement as it will destroy all the pockets of profitability which will as a result convince the parent bank that this solution is strategically flawed.
The second strategy is to observe, learn and integrate. With incubators, accelerators, elevators, hubs, the corporate Goliaths are offering funding, access, connections and guidance to the Davids. HSBC, Lloyds, and Barclays, as well as foreign banking groups like BBVA and Sabadell, now control new Fintech firms with hundreds of millions in behind-the-scenes investment, dominating 1 in 4 deals. In doing so, they make sure that the next Neo will take the blue pill and grow up safely in the banking matrix. Although the cost is spectacular, everything must be done to stay competitive with the disruptors.
Indeed, the already operating disruptors are the biggest threat as they maintain relentlessly focused on improving the end-user experience. These Fintech innovators keep raising the bar with new technologies that aim to transform legacy financial system and processes. They call out banks for only wanting to apply technology to better their existing way of proceeding. It s the epic battle between Techfin and Fintech.
But the disruption concept has its own limitations. Customers demand a flexible, simple and user-friendly experience. They will reject fragmentation and the trouble to navigate through dozens of app. A consolidation of some sort will need to happen perhaps in forms of a shared platform, and who better than the banks to provide it?
Also, what will happen to the disruptors’ revolutionary purpose when banks make an offer you can’t refuse?
That’s why I truly believe the real solution lies in the partnership between banks and Fintechs. The latter have agility and technology-first mindset whilst incumbents have consumer trust and the customer base. A happy shared customer is better than an unhappy exclusive one.
Banks will have to pick their partners very carefully. Lightweight integration will allow ease of deployment, speedy proof of concepts, efficient scalability, while secure use of customer information will offer peace of mind.
Banks are risk averse and extremely conservative. Partnership will help them safely break free from the shackles of the big ships, create truly value-adding products and services for tech-loving millennials and ultimately fuel the businesses of those who are the major drivers of economic growth and job creations: the SMEs. Due to the 2007-2008 financial crisis and the stricter regulations such as Basel III, banks sacrificed those that contribute to 60% of the GDP and 67% of full time employment on the altar of minimal risk appetite and costs of borrowing. Deemed low scale and highly complex businesses, SMEs have lost the ability to ensure sufficient funding, liquidity and capability to manage their finances in general. The funding gap also created mistrust for banks, leading SMEs right to the opened arm of Fintechs.
We are closer than ever to have a technologically-agile, user-friendly, economic and social growth stimulating yet regulated financial system. The stars of the Win-Win-Win path between the incumbent, the challenger and the customer are finally aligned. We just need to know where to look.
First appeared at Finextra