How can banks compete against Fintechs outlines the core strategies bankers can follow to survive and thrive in this digital economy.
Banks are under tremendous assault from an array of Fintechs which are unbundling every aspect of banking. Apparently, in recent years some of the behemoth banks have awoken from their slumber and are executing countermeasures against the upstart invaders.
The central question centers around whether Fintechs can carve a bigger slice of the financial services pie or continue to be niche players with excellent experience and sophisticated technology but not the critical mass regarding customers and assets. Are most of the Fintechs just waiting to be acquired by large banks as their main exit strategy? Or will a significant player a la a PayPal or Etrade of the dot-com era emerge from the Fintech era? Only time will tell how the digital 1. natives will perform and evolve.
Meanwhile, though it is imperative for banks and other financial institutions transform the core capabilities to be relevant in the digital world.
How can banks compete against Fintechs?
Here are 5-ways banks can compete against the Fintechs and emerge victoriously.
Define your Core Audience:
For example, if a bank determines that their sole focus is serving the baby boomers, it may be a worthy goal – at least for next 25-30 years as the 70 million-plus cohort as it goes through the retirement and sunset years of their life.
However, if the banks choose to serve millennials – another 73 million cohort – it is a different ballgame altogether.
Of course, even the younger of the baby boomer generation has become adept at using digital channels. But if your bank’s core audience is the millennials, without abundant digital capabilities, you can write this segment off.
2. Become De facto Tech Companies:
For legacy banks to transition into the digital realm, it is essential to think of themselves as “technology companies that happen to be in financial services.” Banks and financial firms have to up their game in recruiting technologists.
“We are a technology company,” Lake said, speaking at JPMorgan’s Investor Day
For example, if you look at banks like JP Morgan, the technology job postings seem to exceed the traditional banking roles. And for a good reason.
In addition to hiring into the bank to swell the technology roles, it is essential banks engage in the concept of “Acqui-hire” wherein a larger financial institution acquires a startup not as much for the idea, but the talent. A startup team that has raised funding launched a concept, and shown some traction means it has a group of talented and motivated people. And an acqui-hire helps banks bring in this entrepreneurial blood into the bank.
For example, the BBVA Compass bank has acquired Simple, Open Pay, and Madiva. Goldman has purchased Final. JP Morgan bought WePay. These are but a sampling of many acquisitions in the Fintech space.
The other way of recruiting tech talent is through freelance, contractors and IT outsourcers. While each has a different operating model and cost structure, the goal for the banks is to up the technology talent among their ranks.
Of course, many banks fail at nurturing and harness such talent and many exits when the period of golden handcuffs expires. If the banks focus on core digital banking capabilities and staff technologists to build these roadmap items, there can be a lot of synergies.
3. Embrace Open Banking:
Hitherto, banks have been walled gardens with pretty much in-house offerings across the board and of course protective and secretive. Today, the world is moving toward open standards, API driven ecosystems, and platform companies.
Banks are ideally positioned to drive new revenues and increase customer experience by launching open banking concepts and the APIs to support the moves. As fiduciaries, the banks should be careful or privacy and cybersecurity and fair use policies. But the move toward open banking and becoming a platform with multi-way interactions is a powerful next wave that banks need to embrace.
Embracing open banking does not mean that banks have to become a Facebook or a Force.com type platform on day one. Instead of a completely open platform, banks can be selective in who they engage with and to which parties they allow data sharing. The data sharing can be bi-directional, and these mashups tend to lead to innovative concepts and business models that the bank has never imagined before.
Leverage Cross-Sell and Upsell to increase Wallet Share: The phrases “Up Sell” and “Cross-Sell” have been misunderstood in the banking circles. It was seen as a way to push the product down consumers throats for the explicit reason to increase revenues and sales commissions. And for some banks chickens have come home to roost and they are paying for the sins of the past for aggressive and often illegal pushing of the products and services.
However, if banks use the vast array of products and services – both homegrown as well as ecosystem partners – to support the consumer in their financial lifecycle journey, it could be a powerful force. Following the Fintech principles of transparency, comparative analysis of offerings, ease of use, and doing away with lockups could be ways banks and financial firms can transcend their image of being behemoths without a heart and emerge as financial partners with a shared destiny.
4. Encourage Intrapreneurship:
Innovative concepts are not the exclusive prerogative of geeks dreaming up ideas on their moms’ couches. Within banks, there is a lot of talent, and it takes the right culture, the room to experiment and fail, a rewards culture that permits risk-taking, and executive sponsorship and mentorship to unlock the hidden talent and unleash the creative energy.
The intrapreneurship can take many shapes and forms. Offering sabbaticals are one way to help employees unwind from the daily grind and come back rejuvenated. Corporate incubation labs are another format that has proved to be successful in becoming fertile grounds for breeding innovative ideas. Secondments and joint venture startups are another formats.
Irrespective of the form and format, having programs that provide the opportunity to nurture and flourish with innovative ideas is a critical success factor.
5. Bank on Cognitive Technologies to Level the Playing Field:
The emergence of cognitive technologies – machine learning, computer vision, conversational AI, deep learning, neural networks et al. – are a game changer for banks.
These technologies can help financial institutions to launch innovative services as many of the concepts do not involve a complete re-architecture of underlying legacy technology platforms. Instead, many of the cognitive technologies work seamlessly alongside the existing landscape and offer ways to integrate underlying data and overlay it with client friendly experiences.
For example, a natural language chatbot can become the friendly face of a bank irrespective of how many different CRM systems and support systems the bank uses. Similarly, machine-learning based data aggregation offers banks to reduce the burden of data entry on bankers and consumers alike.
If banks and large financial firms adopt these strategies and execute them flawlessly, they will be useful in negating some of the impacts of the competition from a slew of startups.