Banks are now seriously taking notice of Fintechs. The “Fintech” concept originates from the combination of finance and technology and is a novel phenomenon of business startups seeking to transform the financial industry.
These could include online or mobile solutions for payments, insurance, transfers, investments, accounting instruments and credit, among other services. Fintechs have come a long way as just a few years ago, by and large, they were brushed aside as a passing trend. With 10,000+ estimated Fintechs in the world, catering to end consumer needs through launched products and services, the relevance of Fintechs is getting stronger by the day.
The looming debate is whether Fintechs will replace banks or will banks invest and take over the Fintechs. Though exceptions have emerged on both sides of the spectrum, the truth is clearly somewhere in between. Far from a “winner takes it all” scenario, the future of the financial ecosystem will see Fintech companies and banks retain their competitive advantages if they acknowledge the value in each other’s coexistence. To understand where this convergence is likely to take place, it is worth considering where Fintech and banks have their respective strengths and weaknesses. Both have something the other wants. Given that one’s strength is the other’s weakness, and vice-versa, it’s only natural that smart banks and sharp Fintechs look to leverage each other’s competitive advantage to preserve their value within the chain.
Personally, I believe there are distinct areas in which Fintechs and banks need to clearly establish their collaborative intent.
- Ability to be Agile vs Understanding of Regulations
Banks: Most banks are currently in the midst of a digital transformation (or at least thinking about it), looking for ways to speed their time to market and to deliver new value or services to customers. However, for most banks, their existing processes do not naturally extend to being agile and rapid. In this case, Fintechs are favorably looked upon to learn from and are being brought in to help banks adapt and deliver quick pilots in order to challenge the norms.
Fintechs: For Fintechs, nothing is impossible, as they rapidly adopt new ways of design and delivery. They pilot fast to learn from customer feedback, iterate and improve the product instantly, almost overnight. However, their speed gets hampered by ignorance of banking regulations. As soon as the Fintech invention is tested in a bank’s setting, regulatory requirements become the hindrance. Fintechs can benefit immensely if this know-how and guidance is shared with them beforehand. They need banking coaching to comprehend and position their solutions accordingly ensuring that their advantage of speed survives.
- Capability to Scale vs Not scared to Fail
Banks: Traditionally, banks have been able to defend the customer interface by controlling the entire value chain. However, as the value chain becomes unbundled and the technology develops at an exponential pace, this strategy becomes too costly and unsustainable. Banks do enjoy the scalability of customers, who in certain cases are captive to try out new functionalities, and revert back with feedback. Banks are well positioned to take an innovation and make it mainstream by offering to its captive base, either on its own, or smartly bundled into its existing packages. Fintechs need and value this a lot.
Fintechs: They love to try out new things and rapidly adjust and innovate even more. What Fintechs face is a genuine lack of audience (at a bank’s scale) who will be willing to experiment with their products and offerings, and will be willing to give candid feedback on the same. Fintechs strive on feedback as they are intuitively fearless and proven risk takers. They realize that a failure is just another step towards success. They are willing to experiment, fail fast to enable another quick iteration to be tested again. Banks can benefit from this thought process and learn to courageously explore this new way of working. For Banks, this trait is one of the most compelling cultural shifts. Fintechs can help make this transition possible.
- Customer Experience vs Trust
Banks: Most customers perceive banks as being burdened by legacy technology and focused on complying with regulations rather than meeting the radically changing needs of the clients via digitization. The need for banking, by and large remains the same, but a new way of banking is demanded by the evolved tech-savvy consumers. Experiences with banking interactions do not have to be boring, mundane and archaic. These can be lot more intuitive, simple and effective. Fintechs start with the customer experience in mind. In order to challenge the age old banking way, they bend over backwards in creating intuitive experiences. Fintechs can truly help banks in breaking this barrier of “held back thinking”. They naturally come and challenge the status quo by saying “why not” instead of Banks who are often found saying “how could we”. Focusing on the why brings about the how, not the other way round.
Fintechs: Being customer centric, technology driven and with freedom from existing limitations helps Fintechs innovate. Use of the most modern technology available to build user friendly client interfaces is arguably their core strength. Because they do not own the underlying infrastructure, their mission is to make the user experience better than that available via banks rather than to protect existing services which rely on legacy infrastructure. They have also proven to be better at extracting valuable customer insight from big data to offer a better service and make quick decisions. What they lack is the trust of consumers. Compared to banks, FIntechs are small, unregulated companies with not much certainty of their future composition. With banks on their side, Fintechs can overcome this barrier.
To sum it up, a successful strategy for banks lies in greater collaboration with Fintechs rather than competition. By making difficult decisions now, banks, especially smaller banks that lack scale, can reap benefits in the future in terms of retaining their clients and growing their profitability through use of technology.
An urgent change in the mind-set is needed among banks which sees digitization as an opportunity rather than a threat. Equally, Fintechs need to understand that, to be viable and profitable, they cannot disrupt the entire value chain of the banks which is a product of a thorough understanding of the financial system and a deep integration within it. For Banks and Fintechs the opportunity cost of not collaborating will likely be the difference between survival and success.
About the writer:
Zubair Ahmed is the Senior Vice President, Head of IT & Business Innovation at Emirates Islamic Bank. Previous to this role, Zubair spent nearly 2 decades in challenging leadership roles, at the heart of the Finance Technology industry. A Harvard Alumni, with 24+ years of IT & financial industry experience, he enjoys been customer facing, engaging businesses in strategic use of technology. Excels in enterprise transformation, has led and produced compelling results in creating business innovation at the grass-roots of the organization. Author of the book "Power To Kids" which serves as a guide in 'applying quality & management principles to parenting'. Actively involved with a number of non-profit causes across the region. As an ardent speaker / panelist and a life coach, Zubair is regularly featured in numerous conferences around the world.