By Yamini Kona, Principal Consultant, Infosys Ltd
Being at the intersection of finance and technology, technology-driven financial startups, famously called fintechs, are companies that leverage cutting-edge technology to provide financial services that are customarily considered to be the domain of traditional financial institutions, such as banks, asset managers and insurance companies. Fintechs’ agile business model is influencing the manner and speed of delivery of financial services. Their fast penetration into the retail-banking and payments sectors, expected to be followed by the asset-management and insurance sectors, has created enough commotion for the banking biggies to sit up and re-think their strategies and service-delivery options.
Fintechs are no longer treated as the new kids on the block. Their elevation in status to disruptors is changing the banking landscape through innovation and customer-focused, customized and sophisticated digital services. Their disruption levels are reaching new heights by the day, leading to the prediction that fintechs will not just eat into the customer base and revenue of traditional banks in the next half decade but will crowd them out to a great extent in the next one. This viewpoint has created the debate as to whether fintechs are just disrupting the banking sector or totally destroying the traditional banking world as we know it.
How fintechs are scoring.
Holding a near monopoly over credit disbursement, being the primary repositories of consumer deposits, adhering to strict governance, risk and compliance have historically been the bulwarks that have made banks appear to be resilient to disruption. Consumers have also preferred to do business with established names and have been reluctant to change their banks. But not anymore! Consumers today are spoiled with options, particularly due to the emergence of fintechs, which are scoring over the incumbents in multiple ways.
Specialization: Fintechs do not follow the traditional banking model of offering a suite of products ranging from savings and checking accounts, loans, deposits, credit cards to mortgages. Instead, they focus on a specialized product or service in the value chain, such as payments, consumer loans, etc., which makes it a lot easier for them to excel in that area.
Fast delivery: Fintechs offer customized products and services that are delivered fast. While one to two weeks to process a loan application and disburse funds may be the norm for banks, a fintech will do it in a matter of hours, if not minutes.
Innovation: At the core of the fintech business model is innovation. These firms come up with new ways and means to reach out to customers and bring easy-to-use online and mobile-based services to their customers’ fingertips. Their products are conveniently introduced into social-media platforms. Utilizing advanced big-data and smart-data analytics, they anticipate customer interests and needs, and run highly contextualized live campaigns and product recommendations. They handle real-time cross-channel and omnichannel status enquiries, and resolve problems much more efficiently and quickly than traditional banks.
Consumer centricity: Tech-savvy Millennials are comparing their user experiences with companies such as PayPal, Apple, Amazon, etc., and are expecting similar ease of use and fast delivery from banks at the tap or swipe of a finger on their smartphones. While Gen Xers were happy with the click of a mouse, Millennials want everything delivered at the tap of a finger on a smartphone. There is a growing demand for speed and convenience, and fintechs are catering to this expectation much more efficiently than the incumbents.
Lower costs: Operating costs for running a fintech enterprise are dramatically lower compared to their brick-and-mortar counterparts. Utilizing secure, cloud-based solutions and alternative-processing networks, fintechs are able to achieve substantial savings in the form of reduced infrastructure and manpower costs. They are able to invest a lion’s share of their funds into developing and deploying state-of-the-art technology and transfer these cost savings to the customer in the form of sophisticated solutions at lower fees and charges.
What is holding back the banks?
We are in an interesting era in which consumer expectations from banks are being increasingly set and driven by non-banks. While some banks worry that fintechs will steamroll them and take away a major portion of their business in the near future, some executives totally write them off and expect the fintech revolution to go down the same path as the dotcom boom. Predictions aside, fintechs are here for the time being, and banks have to rise to the challenge they offer. Whether fintechs stay or disappear in a few years down the line, there is no turning the clock back on the changes in customer expectations that they have brought. Despite realizing the pressing need to revisit their legacy business models, banks are not completely able to shake off their old-world shackles for multiple reasons.
Cannibalization: Unlike fintechs, banks cannot focus on and promote any one product or channel-of-service delivery to the detriment of others. Aggressive promotion of online and mobile banking by offering them at much lower prices than branch services, for example, would eat into branch profitability. Such cannibalization would neutralize whatever increased profits are realized from excessive focus on a single product or channel of service.
Innovation is not cheap: Despite the threat of “innovate, or perish”, innovation comes at a very high price for banks. They cannot introduce state-of-the-art technology just for digital-banking services to compete with fintechs without achieving omnichannel capability, which involves replacing legacy core banking infrastructure. In addition, banks have much higher operating costs, which limit the availability of funds to invest in innovation or to offer services at lower prices to match fintechs.
Regulation: Regulation, risk and compliance norms hold back banks from jumping into overly adventurous experiments. Their fintech counterparts are not as hampered, as they are not subject to much regulation, at least for the time being.
Lack of independence: Big banks are publicly held companies and have to keep in mind shareholder sentiments before embarking on bold and risky ideas. They do not have the independence to make fast decisions as enjoyed by venture-capital funded fintechs.
Banks are not going away any time soon.
Does the growing clout of fintechs and lack of swift response from banks sound the death knell of banks? Not necessarily. While loss of revenue and erosion of client base is certain if they don’t ramp up to meet the fintech challenge head-on, banks are not going away any time soon.
Transaction volumes handled by fintechs may be considerably higher, but banks enjoy value-based business. The value of each transaction and all transactions put together processed by fintechs is relatively small compared to the monetary value of banking transactions. An average customer would rather write a bank check when a large amount is involved, instead of using a fintech service. A customer would prefer to discuss a complex mortgage product, which may take multiple iterations, at a branch in person instead of relying on advice from a faceless online chat assistant. A checking account coupled with savings account and a pre-approved reward-based credit card, a pre-approved mortgage and auto loan to an existing customer offered by a bank are some of the options not available with fintechs. The convenience of the “one-stop shop” is preferred by conservative customers.
Although the banking crisis triggered by the mortgage meltdown in 2009 shook consumer trust in the traditional banking system, the average customer would still trust his/her bank rather than a fintech upstart with a large savings account. Big banks have large customer bases running into millions who will not move their monies out overnight to a fintech. When a bank insured by the FDIC (Federal Deposit Insurance Corporation) goes bankrupt, customer money is safe to the extent of $250,000. Another strong bank may step in and take over, as happens in most cases, and the transition is usually seamless for customers. But what happens to the monies invested with a fintech if it goes bankrupt? There are no regulations governing them to provide such security to customers.
As long as the competing fintechs are startups that do not offer a range of products, banks may not have to get into existential crisis mode, other than worrying about the pressure on margins and retaining their existing customers. But what happens if big names such as Apple or Google choose to get into the banking business and start offering checking accounts and mortgages? Millennials are sure to jump ship, and they are the future customers who will drive business. Do banks want to wait until that eventuality?
From competition to coopetition: a happy union of banks and fintechs
Banks have come to accept that competition from fintechs is real and is only going to grow. Banks also need to understand that fintechs are not all about technology; they bring in an agile mindset. Fintechs are also prudent enough to recognize that, even with their technological edge and innovative products, they are not going to acquire enormous customer bases on the scale of banks or instantly earn the trust of customers so that they invest their millions with them. Getting their path-breaking solutions to market is not that easy or simple. If regulators choose to bring fintechs under their purview, which may happen sooner rather than later given their increasing scales of operation, they do not really have the necessary risk and compliance wherewithal in terms of technology and expertise.
Given this scenario, strictly from a business point of view, it makes more sense for banks and fintechs to join hands and complement each other instead of competing with each other. Neither party seems averse to the idea of treating each other as potential allies instead of opponents. Their collaboration is taking the shape of partnerships and of banks investing in fintechs with promising transformative technologies, valuing them as independent innovation labs. Big banks contemplating taking over fintechs that complement their core competencies should not come as a surprise, either. Finding the right fit will certainly be a challenge. Like any partnership, the union of banks and fintechs will have its fair share of practical problems, such as culture clashes and conflicting business models. Still, there is more to gain for both parties than spending time and money in defensive measures as competitors.
The idea of delivering fast and sophisticated digital-banking services to millions of customers boosted by fintechs’ cutting-edge technology coupled with the robust security assured by banks is definitely the best of both worlds. Their partnership can bring together strong customer base and trust, regulation and innovation—the holy trinity of successful banking.