New entrants into the banking industry have given bank CEO’s pause and have put their CIO’s under pressure to come up with relevant digital strategies to defend their business from customer leakage to new products and services offered by emerging ‘FinTech’ companies.
Who are these FinTech companies?
Most FinTech companies fall into the following categories
Companies such as Lending Club, Prosper, SoFi, Zopa, Square,Stripe, Betterment, Wealthfront, Personal Capital, eToro, Faircent are good examples those that have taken advantage of areas of weakness in banks digital strategy.
Although the threat of losing customers is real in the long term, in the short term the consumer is keeping their core relationship with their bank and using the services of the FinTech new entrant for value added products and services.
Why are the large retail banks keeping their core banking systems and why are new FinTech companies not replacing them?
The answer is complex and revolves around cost, regulation and reputation. The challenge of updating legacy core banking systems is onerous and, in some cases, can introduce systematic risk if not well managed. Banks have resisted upgrading their core banking systems for many years even as industry pundits have been heralding the upcoming upgrades.
- Cost: It is very expensive to create a new core deposit account system with all of the associated features. Replacing a core banking system from scratch will cost in excess of $100mil for standard functionality.
- Regulation: Since core banking is the lifeblood of the retail economy government has created decades of regulations overseeing every aspect of activities that flow through the core banking systems. These legacy systems have these complex regulatory solutions built in.
- Reputation: Although banks are not popular, people still hold animus for the financial crisis, most people still trust that the existing banks will process their transactions and are very cautious about moving their relationship to untested new entrants.
Will Banks Digital Strategy move quickly enough ?
A look at some of the findings of PWC’s Global survey of financial services shows that CEO’s are becoming more dependent on data, analytics and technology that delivers value to a more demanding customer base. Unless Banks invest more in technology and innovation they will loose business to FinTech companies that are not constrained by legacy systems and approaches.
The future of banking is still being debated and although many have theorized that traditional banking will eventually be eliminated by new FinTech solutions is not yet clear that will be the case. In the mean time banks are automating more of their manual processes using workflow management tools and new technologies to speed up decision and approval of loans.
Banks have had to change their thinking such as using social media and mobile to acquire new customers and defend against new entrants like Apple Pay. They are also looking at every competitive new entrant with a view to either integrate or partner with them.
FinTechs have momentum in building a base of customers, especially among young adults but traditional banks can compete effectively if they’re willing to put the customer’s priorities at the center of their technology strategy. Some banks are removing errors and manual processes from their branches and call centers and driving their customers to more meaningful self-service channels. But they still need to evaluate ‘what do my customers want online’ vs ‘what am I offering my customers online’ to out compete their FinTech challengers. The real test of how well banks compete with FinTechs is how they can service their existing customers with innovation and new product offerings.
The worst-case scenario is that banks will become relegated to being ‘processors’ or the ‘back end systems’ for these new FinTech companies.
Evolution or Revolution?
Banks have no choice but to move quickly to focus their technology budgets on the most effective customer engagement technologies. Customers’ rising expectations for anytime, anywhere banking is setting up a competition between FinTech and traditional banks for consumer relationships. These relationships will be true cross product and deeper than existing banking relationships when technology converges.
US Banks have been slowly embracing digital solutions with European Banks leading more innovation and Asia coming in a distant third. There are a number of reasons each market is moving at different speeds, legacy system complexity, management intransigence, cost and regulation being leading influencing factors. Culture is also playing a large role in the adoption of new technologies in each market and this will also play out as new services become more commonplace like the M-pesa system in Africa.
Revolution occurs in any system, either financial or political, when the environment it depends on for survival changes at a faster rate than it can evolve.
In the end I don’t think there will be a ‘revolution’ in banking because the combination of regulation and cost will give Banks the time they need to ‘evolve’ through innovation and absorb the new technologies they need by buying targeted FinTech players to service their ever changing customer needs.
Thanks for reading
Best regards: Norman King
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