Will Banking and Fintech Merge or Collide?
Financial services technology disruption isn’t exclusive to wealth management. The impact that fintech, and tech in general, has had on banking, both in terms of intensifying existing competition and adding the threat of new entrants, is forcing many institutions to re-examine the way they approach, interact with, retain, and lend to customers.
Traveling at 1,000 Miles per Hour
What is difficult to debate or, more detrimentally, ignore are the headwinds facing banks in 2016 and the vacuum they have created for fintech startups. A seemingly constant flow of financial regulations since the Great Recession, like the Dodd-Frank Act and the Basel III Accord, and the resulting increase in compliance overhead are making it more difficult for banks to operate in a largely profitable manner. Combine this with another effect of the economic crisis that shows no signs of subsiding—ultra-low interest rates—and it’s easy to visualize the cost/revenue squeeze that banks are enduring. Lastly, there is the compound issue of low trust and heightened expectations among banking customers, which has created an extremely competitive market, one attractive for new entrants or nontraditional substitutes.
Carpooling Saves Time and Money
Some banks like Barclays have decided to take an objective position and evaluate whether or not an outside technology vendor can help them become more efficient by absorbing specialized tasks. Using Hadoop’s technology stack, Barclays has reduced the time it takes to process its small business customer data from six weeks to 21 minutes. Peter Simon, head of information at Barclays, explaining why the bank made the switch, said, “There is a technology capability that exists now that didn’t exist two or three years ago that lets us do stuff that is timely, relevant and insightful for the customer.”
Additionally, Barclays turned to Salesforce for a cloud-based, customer-centric solution to its end-user engagement problem, as prior to implementation, the bank operated a traditional silo-to-silo workflow. Salesforce’s platform provided Barclays with a much greater level of transparency both in terms of understanding the external experience and communicating and collaborating internally. Above all, Barclays wanted a clearer view of its customers so that it could deliver the best, most sought services and products possible.
As Aaron Fine of the Oliver Wyman Group said in American Banker, “The future is cooperation. But banks need to think introspectively and figure out what they are really good at. And tech companies need to meet the regulatory and service culture required in financial services.”
The Case for a Demolition Derby
While successful partnerships between banks and tech companies exist, there are still reasons for caution. Banking institutions are inherently risk adverse; their propensity to be so is a fundamental and vital characteristic of their existence. Therefore, the idea of pursuing a strategic alliance with a small, untested and unregulated startup—all in the name of innovation—is an uncomfortable one to consider, let alone accept. Expectedly, some banks have taken the course of building their own innovative solutions: an attempt at beating fintech firms at their own game. While understandable, the final product may or may not produce the margins banks want and need.
By considering the following three areas of partnership evaluation, an institution can decide whether or not a tech company is worth approaching:
- Trustworthiness—is the company’s product positioned as a solution for banking or a substitute to banking? If the latter is true, a buyout to remove the threat may be possible, but that could create additional balance sheet problems.
- Scalability—is the business capable of implementing its solution across the entire organization and remain as a support partner throughout and beyond the process? Anything less wouldn’t exactly constitute a productive partnership.
- Maturity—is the startup self-aware and client-focused? While it may not operate with the same gravitas found in banking, a startup should at least behave in a manner that conveys a sense of understanding and respect for the industry.
Be the Best at What You Do Best
While banks’ apprehension around integrating external fintech innovations is certainly defensible, Aaron Fine outlined an incredibly valid logic, echoing the distinctions of David Ricardo’s comparative advantage theory: “They have to think across each individual function, not as a bank as a whole, but how do they operate as a risk and finance company, a product design company, a digital company, a marketing company. Am I actually good at this? And if not is there someone out there I should partner with?”
Whether banking and fintech merge or collide remains to be seen, but as banks continue through this period of disruption, the earlier such questions are asked and answered, the more prepared an institution will be to evolve and succeed.