Much talk in financial services over the past several years has focused on who will win the battle between the banks and the fintechs? The fintechs promised to simply do things better by removing the red tape that has long surrounded financial services – everything from making it easier and quicker to get loans (even when credit was subpar); to extending services (like cashless transactions) to reaching underserved population segments around the world; to enabling businesses to raise money through crowdfund platforms and ICOs. The fintechs seemed to have agility, hunger and aggressiveness on their side to disrupt financial services.
Since that initial hype, the general perspective has grown more balanced, aided in part by the rocky road of the P2P lending platforms; the large number of ICOs that have proven to be scams; and the erratic swings of leading crypto coins. With that initial exuberance tempered, we’re reminded of the huge assets traditional banks have on theirside: proven legacy resources, security experience, customer loyalty and regulatory acumen honed over decades. Logically, we’ve shifted to a more relevant question: how can financial services firms best position themselves to compete successfully in a market where fintechs have set new standards for ease, convenience and speed?
More Effectively Leverage Proven Legacy Resources
Mobile is exploding in financial services, much like other industries. Bank of America reported that mobile deposits have overtaken in-branch deposits for the first time in their last quarterly earnings announcement. This shift helped the bank slash costs, contributing to its better-than-expected quarterly earnings.
Looking beyond pure cost benefits, mobile represents the future of customer-focused innovation in financial services. Leading banks are rolling out new applications promising more speed and convenience than ever before, like mobile photo check deposit and bill pay. There are tremendous advantages to be gained through developing and offering such apps, but the challenge is reliably and securely supporting this mobile transactions surge, which is expected to more than double between 2015 and 2019.
Reductions in volume pricing for newer types of computing platforms have not kept pace with this growth. Add to this the fact more manpower, datacenter space and energy costs are often incurred to support these systems, and it becomes clear that any potential cost benefits associated with greater mobile adoption can quickly be erased. Traditional banks often view their tried-and-true legacy resources – the only ones proven to be capable of handling the current mobile transactional deluge, cost-effectively, securely and reliably – as a hindrance, an impediment to agility. In reality, these resources are actually huge assets, but changes are definitely in order: namely modernisation of these systems’ development and delivery processes, in order to make them capable of providing customers with innovative digital services.
It can be extremely difficult for large, well-established organisations that have dominated industries for decades to achieve competitive differentiation. Consider two or more century-old banks that are considered competitors yet offer customers nearly the same set of products and services. They have survived and stayed on top to date, in large part simply because they are big and omni-present.
The digital economy changes this entire paradigm, as customers prize ease, speed and convenience above all else. Today, it is software developers who push an organisation ahead and set it apart, turning innovative ideas into customer-facing deliverables.
It’s therefore surprising that too many organisations still aren’t giving developers the tools they need to do their jobs effectively. Consider the example of legacy resources. Developers at traditional banks – which rely on back-end legacy platforms as their transactional workhorses – come face to face with these systems as they develop modern applications spanning multiple platforms, starting with systems of engagement (like web servers) at the front-end. When legacy resources are not modernised for newer generations of developers, the entire process slows and developers are impeded. This often results from a misguided belief that legacy platforms are going away and aren’t worthy of innovation.
Invest and Collaborate
Perhaps that’s why research has shown a strong uptick in traditional banks investing in fintech. This investment can take different forms including acquisitions designed to crack new markets, particularly consumer-oriented services. Investing in blockchain startups is also growing as a global phenomenon, with Goldman Sachs earning the “Patron Saint of Fintechs” moniker.
Investment also takes the form of traditional banks launching their own fintech services (Goldman Sachs’ Marcus consumer lending service is one of the most well-known examples) as well as building new services directly upon existing fintech solutions, such as JPMorgan’s recently announced alternative investment platform based on iCapital Network.
Just a few months ago, Facebook revealed it is endeavouring to get into the financial services space through partnerships with major banks. Social media sites attempting to dabble in financial services could represent a market disruption of their own. But the broader implication is that the sheer strength, scalability and stability of traditional banks carves out a unique and irreplaceable niche for them in the digital economy – provided they can also be fast.
The past few years have shown us that the fintechs have not replaced traditional banks. But the fintechs have succeeded in raising customer expectations for easy, convenient, fast and secure services. In fact, all the online services the public interacts with, from ecommerce to social media and more, have reinforced these expectations.
Traditional banks have huge assets and advantages, but exploiting these fully will require them to recognise the intrinsic value of legacy resources, while simultaneously equipping and inspiring their developers with a fintech-like mindset. This will allow them to explore new opportunities and evolve their approaches to keep pace with the speed of the digital economy, all while resting upon the trust they’ve built with customers over many years. In the digital economy, big no longer beats small; instead, fast beats slow. If big can be combined with fast, there’s no stopping these organisations.