FinTech v the Banks: Uneasy Bedfellows or a Match Made in Heaven?
By Rahul Singh, President, Financial Services, HCL Technologies
The rapid succession of macro and micro-economic forces unleashed in the aftermath of the global economic crisis have fundamentally changed the face of the financial services industry as we knew it. Major regulatory changes mean that the banks no longer enjoy the oligopoly they once held over the delivery of financial services. The floodgates have been opened for new competition, and the stricter guidelines over the way financial services are delivered have impacted on their profitability. The social impacts are equally prominent; trust in the big banks has been shaken and today’s customers don’t feel the sense of loyalty that prior generations did.
At the same time, the surge of innovation in technology and emergence of a new generation of digital natives is leading to the consumerisation of financial services. Customers now have a very different outlook than before, favouring customer-centric organisations that embrace technology to deliver new and more personalised services with greater efficiency.
Enter the FinTech-ers
This perfect storm of circumstances has given rise to FinTech firms; a new breed of financial services organisations built around technology. These businesses have created a new industry subsector and are driving major disruption in the traditional financial services markets. For example, start-ups such as Lending Club and TransferWise are giving banks a run for their money in the delivery of the more profitable fee-generating services, such as loans and electronic transfers. The UK government’s chief scientific advisor reported that this new breed of financial services firm generated £20 billion for the country’s economy in 2014. With London at the heart of the global revolution, the UK is the fastest growing investment region for FinTech in the world, and the government is pumping in a significant amount of investment to ensure that this astronomical growth continues into the future. Traditional financial services firms are therefore fast waking-up to the realities of this new era of competition, and the need to respond quickly if they want to remain relevant.
A key part of the challenge the traditional banks face will be in achieving the same level of customer-centricity that their FinTech counterparts are able to create. The ability to adopt cloud computing and harness analytics is a major contributor to the ease with which FinTech firms are able to embrace agility to deliver the services that the market is calling for efficiently. The simplicity with which these services are created and delivered is also a significant factor in their success. However, for traditional banks, it is far from easy to achieve similar results. Their legacy IT infrastructures make it difficult to deploy newer technologies quickly, and creates a higher cost-base compared to FinTech start-ups with their green-field IT landscapes. Not only does this mean that traditional banks are unable to innovate as quickly as FinTech start-ups, but it also means that it is far more difficult for them to compete on price whilst remaining profitable.
Friend or foe?
Rather than seeking to directly compete with FinTech firms, or viewing them as a potential target for acquisition, some banks are looking to create a more symbiotic relationship. By collaborating with one another, banks and FinTech firms can enjoy the best of both worlds, gaining access to the assets and capabilities that each possess in order to create mutual benefit. For example, banks can harness the technology hotbeds created by FinTech firms to offer more innovative solutions to their own customer-base, without needing to invest time and capital in development. In return, the banks can provide the brand awareness, scale and expertise needed to help often relatively unknown FinTech start-ups grow quickly and gain market share in an increasingly competitive landscape.
Many major high-street banks have even launched initiatives to encourage the growth of FinTech firms. For example, Barclays launched its Accelerator mentoring programme to offer start-ups the support they need to succeed. Elsewhere, Santander has created a $100 million investment fund to give new Fintech ventures a financial boost. However, banks have traditionally been reluctant to collaborate with partners, preferring to manage services and delivery chains internally. As such, there will be significant cultural and management challenges to overcome for those looking to embrace this partnership approach. Banks will need to adopt a new role as an orchestrator of financial services, building the alliances and capabilities needed to meet the demands of today’s customers effectively. This process can be eased by enlisting the help of technology partners that have the experience of creating collaborative environments such as innovation labs, where banks and their FinTech partners can work together more effectively to improve services.
While the banks appear to be in no evident danger of losing control of core financial services, such as the current account, these areas of their business are often the least profitable. The real threat that FinTech firms present is in eroding the revenues from the more profitable add-on services that the banks offer alongside their core products. As a result, the banks must start to look at ways in which they can inject agility into their business models in order to remain relevant and meet the needs of the market. It might be against their instincts; but by treating their FinTech counterparts as potential collaborators, rather than inherent rivals, banks can get back in the game and spearhead innovation.