We all know that banking is changing course. But where is it going? Attitudes towards banks have been changing steadily in recent years, and with new alternatives readily available and often able to provide a better service, consumers and businesses alike are looking elsewhere.
A global survey of more than 8,000 consumers in 2018 showed that 34% of all consumers, and 52% of 18-34-year-olds, would consider banking with a familiar tech giant such as Amazon, Google, Facebook or Apple rather than a traditional bank. The main reasons given were for simplicity and convenience (42%), followed by a more personal service (23%).
In our on-demand world, consumers expect faster, cheaper, more personalised services and business banking is following suit. But the larger banks, with legacy systems in place, are struggling to deliver the solutions needed to help these fast-paced businesses succeed and compete effectively. Fintechs have served consumers well and are now turning to business banking. However, many are struggling to gain traction without the customer history and existing relationships held by banks.
A connected future
The 2018 FinTech Disruptors report, published by MagnaCarta in December 2018, includes insights from some 5,000 professionals working in banking, financial services and fintech across EMEA. Those surveyed and interviewed for the report believe 31% of bank revenue is at risk from fintech competition over the next five years.
Banking Circle research in 2018 showed that banks are gearing up to take on the challenge presented by fintechs. And the FinTech Disruptors report revealed that both banks and fintechs are keen to unite to deliver better solutions. Change is on the horizon, and the future looks interconnected.
Fintech solutions are making the world a smaller place. Having been created with customer needs at the heart they are able to deliver convenient and seamless payments. Even the smallest business and newest start-up can now operate on a global scale, sending and receiving payments quickly and cheaply, locally and internationally.
In contrast with the traditional correspondent banking network process, Fintech payments are received in seconds rather than days, cost pennies rather than pounds and take place with just a few taps or clicks rather than detailed paperwork and phone calls – or even trips to few-and-far-between local bank branches.
From competition to collaboration
Banks today understand the need to focus their resources on managing the customer relationship, rather than on non-core activities. In order to remain competitive and relevant in this market, many of these banks are already partnering with third party financial tech businesses and financial utilities such as Banking Circle, to deliver non-core banking services. It’s a new world of seeing each other as collaborators rather than competitors.
It is only in recent months that banks and fintechs have accepted that partnerships are the only way they can offer their valuable customers the best solutions, without compromising on the relationship. The idea of large or small banks working with external partners to deliver banking services would have been unfathomable just a few short years ago, but financial institutions are now ready for this pioneering vision.
The FinTech Disruptors report claims fintechs ‘make better use of insight to develop and improve what they sell. More than half of fintechs use customer insight to design products, compared to a little over one quarter of banks.’ Building solutions together is often the best path. However, as Michael Rouse, chief commercial officer at Klarna in Sweden, said in the report, “You have to make careful choices. Ask yourself ‘who do I want to work with that also wants to solve the same specific problems?’”
Mitesh Soni, director of innovation and fintech at Finastra, added: “Real platform players are coming into the market from adjacencies such as big tech companies like Google, Amazon, Facebook, Apple, Alibaba – they don’t have core banking experience but are looking at the world through the lens of consumers shaping attractive user experiences and have a real advantage.”
Financial utilities do not compete with banks or fintechs and can underpin a financial institution’s offering, providing their non-core functions such as payments, FX and lending. This allows financial institutions to focus on their customers and add value to their customer service proposition, and, importantly, remain competitive.
Uniting banks and fintechs
For the third consecutive year the 2018 FinTech Disruptors report showed that creating or extending partnerships are the main goals of banks’ intentions with fintechs. Of course, these goals are not always easy to bring to fruition. As the report explains, banks have very different cultures and legacy systems in place, compared with fintechs, and this can cause compatibility issues and delays in collaborating successfully. Faster-paced fintechs can find these processes frustrating.
In the current market, banks and fintechs are still quite some distance apart, but the gap is closing. The report concludes that whilst the “customer-centred, data-rich operational model of fintechs is more relevant than banks’ in a digital age”, “Fintech’s ‘no legacy’ advantage is no longer a given.” Working in partnership with fintechs and financial utilities to provide efficient and convenient solutions, banks are now better able to compete in this market, where “progress will be determined by an ability to respond to new technologies and emerging regulations”.
Building the best solutions requires the best quality data to identify customer preferences and current market requirements. Few banks or fintechs have the in-house resources to monitor the market, analyse the latest data and successfully implement a continual process of renewing solutions to ensure they meet changing market needs. This is where partnering with a third-party financial utility such as Banking Circle can bring huge benefits.
The financial utility can handle the tech side, without it being a burden on resources. The financial institution is then able to offer affordable, flexible and efficient credit, payments and FX to all customer segments. Banks and fintechs can then provide the best service possible, empowering businesses to reach their full global potential, without payments or lack of access to credit holding them back.
Banks are becoming more agile and better able to compete, and in ten years’ time banks and fintechs will look much more alike than they do today.