August 8, 2017 | Written by: Mark Sullivan
Categorized: Banking | FinTech
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No industry today is immune from the assault of disruptive competitors. In the banking world, those disruptors are the fintechs, companies that exist at the intersection between technology providers and financial service providers.
Fintechs appeared on the scene about a decade ago, and started cherry picking a number of financial services that had historically been provided by banks. They marketed themselves to a range of consumers, often with the lure of slick technology. But as innovative as they were, they didn’t seem to pose much of a threat to century-old institutions with billions in assets.
As fintechs multiplied however, the cherry picking became more aggressive. And the banking industry took notice. Now, banks are responding to the fintech challenge by taking a page from the fintech playbook and initiating some disruption of their own. Banks are developing new capabilities in-house, partnering with fintechs and, in some cases, acquiring them.
Earnings versus eyeballs—Measuring success by different metrics
Although they provide some of the same services and serve some of the same markets, it’s important to note that fintechs and traditional banks have many fundamental differences. First of all, banks and fintechs appeal to different demographics. The fintechs target people who have high expectations for technology—especially mobile technology—but may have relatively little in the way of assets to invest. For banks, the core business is with people who generally have more wealth in the form of homes, businesses, brokerage accounts and cash savings.
Most banks pride themselves on offering “full service” even though, inevitably, not all of those services are equally profitable. Fintechs, as noted above, have the luxury of cherry picking only the higher margin services. Finally, the success of a bank is judged by its earnings while the success of a fintech is more likely to be measured by click-through rates and the number of eyeballs viewing its website. Investors in a promising fintech may be willing to wait for years before their start-up turns a profit. Shareholders in a bank are usually not as patient.
Innovating in the digital front office to serve both audiences
The challenge for banks, of course, is to capture the business of the tech-loving crowd while continuing to serve their more established, affluent customers in a cost-effective manner.
In the past, banks have had a long history of technological innovation. From the first ATMs, to online banking, to their own mobile apps, banks led the way in consumer convenience for decades. Then they fell behind. They will now need to return to their history of innovation in order to deliver the front office customer experience that both the technologically adept and the traditional customers expect today—rich, personal, and available anywhere at any time, recognizing that both groups want their processes to be as frictionless as possible.
The digital front office of the near future will involve high levels of customization based on cognitive insights drawn from both internal and external data. It will probably offer a number of “why didn’t someone think of that earlier?” services. For example, it doesn’t take a great stretch of the imagination to picture someone walking into a car dealership, whereupon a smartphone app (without being too intrusive) recognizes that this valuable bank customer may be in the market for a new car. If that person has a long-standing relationship with the bank and, perhaps, a FICO score of 800, a car loan might be offered and approved with a few strokes on a smartphone.
Banking with a trusted brand at the center
The successful bank of tomorrow will likely be a broker of services, quilting together capabilities from a variety of partner organizations, including fintechs, with the bank and its brand at the center. Customers, frankly, aren’t too concerned with which company, exactly, is behind the scenes providing a service, as long as that service is simple, seamless and reliable. And the safety and reliability that traditional banks offer is something that all banking customers—whatever their circumstances—still value.
Relationships—The most-important asset and most important advantage
However the competition between banks and their fintech rivals evolves in the future, it’s the customers who stand to be the ultimate beneficiaries. The expertise that banks have built up in managing full service customer relationships is not easily replicated and it may prove to be the banks’ biggest advantage. As a report on banking from the IBM Institute for Business Value put it, customer relationships will become the banks’ single-most-important asset.1
1 Brill, Drury, Lipp, Marshall & Wagle, Banking redefined Disruption, transformation and the next-generation bank, IBM Institute for Business Value, October 2015
Read this related blog: “What technology will transform financial services?” to learn how a wealth management firm is transforming their financial business models with artificial intelligence.