As consumer demands reshape the banking and payments landscape, the industry is making friends with fintechs that can help cut costs and drive growth.
Worldwide spending on information technology (IT) by financial services companies is expected to reach nearly US$500bn by 2021, up from US$440bn in 2018, according to market research firm International Data Corporation (IDC). According to IDC’s research, there are three main reasons financial services firms are pouring money into IT: to improve the customer experience; to modernise legacy systems such as payments, lending and claims; and to bolster fraud, security and compliance needs.
Firms that resist or ignore these powerful forces of technology will face serious repercussions. Given current transformation rates, research advisory firm Gartner predicts that by 2030 only 20% of existing financial services will actually change and be successful, while the rest will “merge, adopt a basic utility service role or become zombie institutions sustained by local regulation or government action,” says Alistair Newton, research vice president at Gartner.
“If patterns persist, and institutions don’t adapt business models, change legacy systems or undergo the massive cultural changes needed, there will be a relatively limited number of winners,” Mr Newton says.
Digital transformation may not be as daunting, thanks to fintechs that have mastered the ability to harvest finer insights from data, apply new artificial intelligence (AI) algorithms and leverage Application Programming Interfaces (API), which allow previously incompatible software to talk with one another. Once considered threats to the industry, these nimbler and digitally savvier startups have the potential to become saviours by helping traditional institutions cut costs and drive growth.
“Fintechs have proven they are agile and able to respond to customer needs much faster,” says Sankar Krishnan, executive vice president of banking and capital markets at consultancy Capgemini and author of The Power of Mobile Banking. “Banks, on the other hand, have realised they need to move faster. What we’re seeing now is a nice degree of engagement and collaboration between the two.”
This new relationship—and the use of augmented reality, machine learning and data analytics—has the potential to make banks more efficient, assisting them with client onboarding, preventing fraud and even easing regulatory burdens. The customer experience, too, is better: data collected on an individual are richer, with credit scores, savings, payroll statements and social media information combined to allow for greater customer engagement and personalisation of financial products. Mobile-banking customers, for example, who use their bank card can immediately be given information about their transactions and statements. They can also be presented with other products and offers specific to them.
“Even if a customer hasn’t walked into a bank, hasn’t gone to an ATM or even necessarily made a purchase, just by checking their balance or previous transactions, we’re now at a point where we can begin to take this passive action and make it an active opportunity with these suggestive offers,” says Blair Newman, chief technology officer of Bell Integrator, a consulting software firm. “Ultimately, digital transformation is about bringing services to the fingertips of customers.”
Yet, collaboration with fintechs isn’t enough if it’s not followed through with a cultural mindset to integrate and upgrade internal processes, says Hakan Eroglu, global Open Banking expert at consultancy Accenture. “Internal processes of approvals and risk and compliance need to be streamlined. Banks are usually quite risk averse, but a certain level of risk appetite is necessary. A proper open banking governance and target operating model are key.”
He continues: “If you have the right infrastructure in place to integrate fintech capabilities into your ecosystem, you can learn from them and use your brand and credibility to offer customers the solutions they’re looking for. The digital decoupling, where you have your modern APIs integrating with your legacy system to be more agile and innovate quickly, is a potential revenue growth for banks.”
In addition, banks must embrace regulations such as the UK’s Open Banking or Europe’s PSD2 (which aims to secure e-payments and expand the financial services ecosystem by demanding strong customer authentication as well as open bank data to third parties) in order to seize the opportunity. Those banks that are truly investing and transforming, and not just being compliant, have the ability to generate higher revenues, Mr Eroglu says.
“A lot of banks talk about the customer journey, but they tend to view it from the inside out, starting from the bank and building outward to consumers,” adds Mr Newton of Gartner. “A real digital player comes at it the other way, understanding how consumers live their lives and engaging them early on.”
In fact, some fintechs see themselves more as creative problem solvers than actual tech players. “Once you are a true tech company, you basically mask the skill of that technology,” says Ali Niknam, CEO of bunq, an international mobile bank founded in 2015 and based in Amsterdam. “When you master that skill, the skill is no longer a challenge. The challenge is truly understanding what the wants and needs of the users are and then delivering it to them in the most profound and easy way.”
Mr Niknam describes bunq as “a user-centric company delivering to people what they want. Today it happens to be a banking product. Maybe someday it will be something else. For us it’s about giving the users an amazing experience and doing so with the trust that maybe other players cannot provide.”
This type of focus on intuitive product design, ease of use and real-time accessibility just may be what’s necessary to thwart an even bigger threat to banks: Big Techs such as Amazon, Google and PayPal that have muscled their way into payments and are now scouring to add other products and services for their sizeable set of consumers.
Big Techs’ footprint into financial services may still be developing, but banks can’t take anything for granted. “If you’re in an environment at the moment that’s generating significant revenue, it doesn’t mean that the status quo is manageable into the medium and long term,” says Mr Newton “You don’t want your legacy, your reputation, to be about somebody who was asleep at the wheel while the change was inevitable and foreseeable.”