In the lead up to Finovate London, bobsguide asked show exhibitors and industry experts a series of questions to get the conversation rolling before the conference. Today's discussion is focused on who currently holds the power in the relationship between the disruptive fintech companies and tradtional financial services. Don Bergal, CMO at Avoka, Puneet Chhahira, Global Head of Marketing, Infosys Finacle, Philipp Pointner, VP Product at Jumio, and Tomasz Czech, Business Solutions Consultant, Comarch share their thoughts.
Who Holds the Power – FinTechs or Banks?
Don Bergal, Chief Marketing Officer, Avoka:
The traditional banking industry is surrounded by new entrants that have already changed the way consumers and small business engage with their financial institutions. But the vast majority of consumers still maintain relationships with traditional institutions for their primary financial needs. In this delicate balance, the financial institutions will need the help of fintech enablers to help them fend off competition from fintech disruptors on a mission to claim their customers.
New fintech entrants fall into two categories:
- Disruptors compete directly with the banks, offering loans, wealth, and banking solutions outside of traditional channels. The biggest potential disruptor has not yet even come into play. Amazon, the most feared of all web based retailers, and the pioneer of the simplest buying experience, is the player who could have huge impact should it enter personal financial markets.
- Enablers, on the other hand, provide new technology to existing institutions, accelerating their digital transformation and arming them to compete with disruptor upstarts.
Three factors put fintechs on a collision course with traditional banks.
- Financial Service Institutions (FSIs) are under siege from the disruptors such as Fundera with small business loans and Everbank for personal deposits that offer convenience, high levels of service, and low cost of doing business.
- At the same time, consumers expect ever increasing levels of convenience, anytime/anywhere access, and simplicity of their banking experience. This is where fintech’s shine, and where tradition banking processes are necessarily slow to keep up.
- The millennial generation target is the prime new business opportunity, and millennial comfort and fixation with mobile devices means banking must be offered with mobile convenience.
The result is that traditional banks will need the help of fintech enablers to offer the same convenience, features and mobile service that the fintech disruptors are bringing to market.
What does an enabler do for a bank? By adding services outside of the core banking process, an enabler can jump start a traditional bank and accelerate its customer-centric digital transformation, even if the main business model has not changed. An example is digital customer acquisition. A user engagement layer that allows consumers to apply for loans and deposit accounts on mobile devices, without changing the core banking systems, can bring a bank to market with new digital offerings in far shorter a time than a complete digital overhaul of back office systems.
So the smart banks will realise the time-to-market is everything, and look to fintech enablers as a source of agility. In this context, agility means offering customers the mobile digital services they demand, tailoring to very specific target markets, and doing it in weeks or months, not two-four year cycles. Agility means rapidly adapting to the desires of the market, measuring results, and adjusting. And reality shows that fintech specialists can do this faster and more effectively for banks than the banks can do it themselves.
Banks vs. fintechs: Collaboration is the key
Puneet Chhahira, Global Head of Marketing, Infosys Finacle:
The US Office of the Comptroller of the Currency (OCC) recently released a report that ranked fintech alongside the Wells Fargo scandal and Brexit as one of the biggest risks for US Banks and their respective operations. And that’s not where it stops; in fact, a major global consulting firm has forecasted that banks stand to lose as much as 60 percent of their profits and 40 percent of their revenues to their newer, more agile, fintech competitors by 2025. All this evidence does give us an idea of the threat that new-age fintechs pose for the more traditional banking institutions.
While research suggests about 58 percent of the start-ups in the financial space survive after the first four years it takes only a few spectacular successes – mPesa, Alipay, or WeChat– to show how banking can be re-imagined. Banks can no longer afford to stand by and watch as these small, innovative start-ups chip away at the profitable niches of the banking business. Banks should definitely be wary of these fintechs, even if there is no reason to get alarmed.
There are trends that are working favorably for fintechs too – the first trend is that of the digitally savvy customer that prefers convenience and experience. The second environmental shift that is disrupting banking models is the accessibility of digital technologies, such as cloud, that enable even the smallest entrepreneurs to set up businesses with the least capital investment possible. The third factor, a bit out of the left field, is regulation. Regulators all over the world have started to view open banking as an enabler for the banking industry and this in turn has opened the doors for collaboration between fintechs and banks.
In an environment of disruption driven by technology, unpredictable customers, and progressive regulators, it has become increasingly important for banks to transform from digital to Truly Digital to counter these headwinds of change and remain competitive.
These factors have made the banks realise that the days of traditional, monolithic banking are numbered, and one of easiest ways to get access to innovative technologies for banking transformation is through collaboration with fintechs. On the other hand, fintechs have their own set of challenges. While fintechs have leveraged their technological capabilities to craft innovative business models that provide unmatched customer experience, banks do have the advantage of a larger customer base, regulatory knowledge, trustworthiness, scale, and financial resources. So while a customer may prefer fintechs for the customer experience provided; when it comes to major financial decisions the same customer still prefers the traditional and trustworthy bank. With these limitations, fintechs have also started to open up to the idea of creating innovative banking business models in partnership with banks.
This creates a symbiotic environment for both banks and fintechs. A bank can leverage the fintech’s agility, innovations, and technology expertise for its transformation, while the fintech benefits from the bank’s customer base, financial resources, and experience in regulatory compliance. Collaborations between banks and fintechs will increasingly become the norm in 2017, and there will be ecosystems formed out of these collaborations that will deliver banking solutions to customers, instead of individual institutions. Banks will act as an aggregator of products and services – some of which they’ll build, and some of which they’ll procure from other service providers, such as startups and fintechs.
There are two schools of thought when it comes to this bank versus fintech face-off. The first faction is of the opinion that fintechs will wipe out traditional banks by disrupting the traditional banking models; while the other side believes that fintechs will not be able to keep up with the tremendous resources that established financial institutions have access to and will burn themselves out. Both extremes have few valid points; but there is a third, and clearly winning, option where both banks and fintechs can co-exist. We believe that collaboration is the common ground and banks and fintechs will work together to create a universal banking model that will be driven by customer focus and innovation. With a helping hand from fintechs, banks will be able to achieve a truly digital transformation, while fintechs will find much needed resources and scale by partnering with banks.
Traditional financial services will need the fintech industry more than the fintech industry needs traditional financial services as we look beyond 2017
Philipp Pointner, VP Product, Jumio
The playing field on which both fintech and traditional financial services play on is about to face an upheaval designed to level it and make it easier for challenger fintech to succeed in the market.
That upheaval is coming in the form of PSD2. A great deal has been written about PSD2 in terms of how third party provider (TPP) access will affect both banks and challengers and how they can maximise the potential and guard against threats.
A critical part of this will be understanding exactly what customers are looking for in terms of their banking experience.
Jumio recently carried out in-depth research of over 700 18-29 year olds (aka millennials) worldwide to examine what they thought of the digital offerings from both challenger and traditional banks. Specifically, we wanted to explore how they felt about the ability to access these services on their mobile devices in terms of the ID and verification requirements.
85.5% of our respondents indicated that they were dissatisfied with the ability to access financial services from traditional providers on their mobile. For challenger banks, focussed on online banking, the picture was stronger with only 7% being dissatisfied. Yet, 84.5% who are neither satisfied nor dissatisfied. This represents nothing more than a huge shrug of indifference towards online only banks.
Why was this? More than nine-in-ten (91%) couldn’t remember their passwords. A simple issue causing complex problems.
We know that in the digital age, digital identity management is all too often a burden for the end consumer and it is driving dissatisfaction, most notably in financial services.
Digital identity management will become even more of a priority in the PSD2 era. For one thing, the directive requires strong customer authentication from all payment services providers accepting card or digital wallet payments online. Equally, when the primary goal of PSD2 is to allow TPP access to bank accounts to facilitate easier payments from multiple payment services providers, the security of this access is paramount and, again, will require effective digital identity management.
We believe that this simply cannot be done without leveraging the latest digital ID capturing technology. Balancing the demand for TPP access with the demand for strong customer authentication will require ID authentication which is fit for purpose by being both secure and swift.
Our own research has shown that 94% of our respondents want to see digital ID scanning offered by their banks. And this is even before PSD2 is upon us.
Where, then, does this leave the question of traditional financial services providers needing fintech more than we need them?
It would be bullish to say that this was entirely the case. But with banks needing to address digital ID management to keep both customers happy and rise to the challenges of PSD2, it might well be the case that the scales have tipped somewhat in the fintech direction.
Frenemy at the gates
Tomasz Czech, Business Solutions Consultant, Comarch
As the dominant role of FIs on their turf is being continuously undermined, they should go to great lengths to form smart alliances with Fintechs - or make 'frenemies' with them.
In a last year's report by FactSet and Scorpio Partnership conducted among HNWIs, 'Google' was the most common answer to the question 'Which company would you be most excited to see start a wealth management service?'
Fast forward to today. "Over time, huge tech companies may be able to insert themselves between banks and their customers, capturing the vital customer relationship and presenting an existential threat," says a recent study by McKinsey.
These days however, unlike in the recent past, truce is given a chance as a countermeasure to this threat. 'The "industrialists" need innovation, and the "innovators" need industrialization', a well-known Citi's report on digital strategies pointed out in Spring 2016.
And even if it seems otherwise at first sight, industrialists might just need innovators more than vice versa, at least for now. According to Capgemini, almost two thirds of banking executives of today regard Fintech as partners, either through collaboration or investment.
Stay hungry, stay foolish
Even if most of these new partners won't make it, even if by and large they're not as much disruptive as supplemental to FIs not being able to run the latter out of business, they still create an opportunity for incumbents to take their traditional offerings to the next level. To grow new operational culture and get a creative boost. Which counts for a lot.
The more so as 2017 will be the year of a digital race. VR, AR, voice-controlled interfaces… How about cognitive computing or blockchain? Each of these technologies is poised to be as groundbreaking as internet or mobile phone once were. Which particular one catches on, and which does not, shall be decided by customers exclusively, and this means FIs must adapt, and adopt the “fail fast” methodology. Run tests, launch, see what happens, start anew if need be. Stay hungry, stay foolish.
Brave new world
In Europe, this gets even more important in the light of new legal changes, as the end of the legislative road of the revised Payment Services Directive (PSD2) is approaching in great strides. The directive, forcing banks to prepare APIs to be shared with external suppliers, is going to turn the market into a much more competitive one...and bring FIs lots of benefits should they decide upon cooperation with Fintech.
For starters, these benefits revolve around cutting operating costs and shortening time-to-market. During a recent Nextbank-hosted discussion panel, Brett King, the founder of Moven mentioned that TD Bank approached him realizing that it would take them “three times as long and cost them seven to ten times as much” to replicate what Moven does.
Joining forces with fintech also means better understanding of customer behaviour and expectations through big data and predictive analytics, which in turn helps to generate new revenue streams.
And no, in terms of PSD2 FIs don't have to be the only ones who provide data and processes for apps created by third parties. You might as well reverse this rule and aggregate the services of external providers in a financial application. Example? In private banking you could automatically extend tailored portfolio alerts, product recommendations, or investment ideas based on clients’ preferences or online activity tracked via dedicated mobile apps.
Something rotten (in the state of banking)
Banks of today have two big problems on their hands. First, it's not being profitable enough. In Europe, according to PwC, a major problem is that the region is 'operationally overbanked' with 130 large banks servicing a €15.3 trillion economy. The result: Operational cost-inefficiency.
Second, it's keeping up with customer expectations. From the dawn of time banks invested in security and resilience of their systems rather than optimisation of user experience. Innovators breathing down industrialists' necks may just constitute a proper incentive to focus on look, feel and comfort too.
Outside of banking, the insurance sector is seen as particularly neglected in this area. "In the whole insurance industry, there's a lack of innovation and the user experience is pretty horrible", argued Timo Breger of Apeiron Investment Group at the recent Finance Disrupted conference in London.
Car instead of horse
Still, some FIs are already on the forefront of innovation. Polish mBank can provide credit assessment and underwriting in 30 seconds via mobile. The Turkish Akbank’s special sauce in terms of concierge are real-time email offers depending on clients’ past transactions, spending patterns, preferences and lifestyles. If a given client makes a transaction in a duty-free store at the airport, they are instantly offered a discounted ride on a shuttle.
The customers now know they want a car, not a faster horse - as ANZ's BlueNotes article puts it, referring to a famous quip by Henry Ford.
Working alone, most FIs can't give it to them.
To read last week's bobsguide debate "Will 2017 be a breakthrough year in establishing better working relationships between traditional financial services and fintech companies?" click here