Why FinTech and Banks need each other

Krysia McKechnie Krysia McKechnie 11th Feb 2019

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Since the banking crisis of 2008, the financial services landscape has altered dramatically. Faced with a range of issues such as low interest rates, lack of customer trust and slow, cumbersome legacy systems, it first appeared that traditional banking institutions were ill placed to compete with the wave of new players in town. These start ups were offering a far superior customer experience, attractive products and fast access to services.

Much in the same way as traditional media outlets who didn’t see the signs fast enough, the big banks seemed doomed. A failure to innovate fast enough in today’s fast-moving digital world can sound the death knell for an industry.

However, the banking world has had a sharp wakeup call in recent years and many institutions have now realised that the days of batch processing and monthly updates are over. They know that customers want a personalised, tailored banking experience akin to their favourite online shopping platforms. Customers want to be able to bank when at a time of their choosing and from wherever they like.  They want fast, responsive services and they want simple and easy to use interfaces when they bank, not branch only, face to face banking such as in the past.

Whilst the big banks have strengths, speed is not one of them. Their slow reaction to the growing digital movement allowed nimble start-ups to take advantage of the gaps in the market left by the traditional providers. Some areas tapped into by the FinTech companies have been particularly successful, for example, peer to peer lending and crowd sourcing apps have expanded rapidly, with the likes of Beehive and Eureeca in the UAE.

Another area that traditional banks overlooked due to its previous unprofitability is serving the unbanked. FinTech companies have a lower cost base and so can deliver services much more efficiently, therefore finding whole segments of the market that have largely been ignored. Providing financial services to those shut out of the market can have a significant impact on society as a whole. Companies operating in this space are usually not just in it for the profitability aspect but for the social impact as well.

However, whilst FinTech companies initially appeared to have all the answers, they also experienced several road blocks. A lack of infrastructure and an established customer base were hindrances to expansion. Lack of brand recognition and ready capital also became obstacles to many FinTech companies trying to scale their offerings. Furthermore, regulatory compliance and risk management, things that are old hat to the banks proved to be the undoing of some new startups.

More than a decade after the crisis that lead to these changes, attention has now settled on collaboration between the banks and the FinTech companies. Rather than competing for consumers, working together is now seen as the way forward. Many banks are increasingly open to working with smaller, niche players who can bring services to them rather than building their own. Furthermore, many FinTech players see themselves as complementary to banking services as opposed to replacing them.

The World FinTech Report by Cap Gemini and Linked In noted that, ‘Bringing in the top talent with the relevant skills and creating the right culture, while also making strategic investments in agility, digital, and operational excellence, will maximize firms’ ability to achieve customer focus. Creating an effective partner ecosystem will also be critical for success.’

It’s no longer enough for banks to rely on what they’ve always done, the future will be owned by those who continue to innovate and work with the new players in the market. The fragmentation of services certainly can make things more complex for traditional institutions however, it can also reap rich rewards.

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