I don’t think you have to be part of the banking industry to have a fairly good idea of what they’re struggling with when it comes to servicing customers. While I am usually a huge fan of nuance, I think that on some level, it can be explained simply: Fintech’s are better at digital financial services than banks are.
The sharp amongst you will notice that both Fintechs and Banks are focusing on one problem, but the problem with problems is that you need to be focusing on the right one. Fintechs are focusing on problems for their customers, whereas banks are focusing on their own.
That is not to say that banks are out of the race. They know, better than us I might add, that they need to make some drastic changes to survive. They know that they need to be more digital (whatever that actually means), they know that they need to adapt faster, they know that they need to innovate, and they know that they need to do it all very, very quickly. Yes, they are constrained but contrary to popular belief, while the problem is with their technology, it is not a technological problem. It’s a people problem.
There are three fundamental misconceptions that make solutions difficult in general, specifically that:
- technology will solve all of banks challenges;
- the risk of change is higher than the risk of standing still; and
- Fintechs and Banks are mutually exclusive.
We will address the first two together because they are so intrinsically connected.
Systems are tools; they reflect the culture of an organisation rather than dictate it. Banks aren’t struggling to keep up because they have old technology, they have old technology because they are struggling to keep up. The difference is subtle but powerful.
Firstly, banks have an organisational challenge. If they don’t manage their hierarchy properly, the gap between decision making and operational data grows. While it seems obvious that the goal is to close that gap, it’s not easy.
Secondly, banks have an operational challenge. They are built to be stable, reliable, and secure. What does each of those adjectives have in common? Certainty. And what is the opposite of certainty? Risk.
Is it any surprise, then, that institutions that are literally designed to avoid risk and celebrate certainty, are bad at innovation? What’s more is that while there are a lot of institutional risks, it's not what’s preventing banks from changing. It is personal risk that throws the proverbial stick in the spokes. As a banking executive, if you make a bold decision like changing the bank’s core banking system, and it fails, it’s your ass on the line. And given how far those decision-makers are from the data they need to make good decisions, their risk increases exponentially. So they leave it for the next generation of executives. Why risk a golden handshake when they retire in 5 to 10, when the younger, more technical generation can solve the problem?
Thirdly, they have a cultural challenge. Because of the first two challenges, banks have a culture that doesn’t tolerate mistakes. Yet innovation requires learning and learning invariably involves some mistakes. Innovation is not something that just happens on its own, it is a complex process and a lot of hard work. The first answer is seldomly the right answer. But the first answer is a critical catalyst for eventually getting the right one.
Fintechs, on the other hand, are designed to be especially good at innovating. Sure they have the modern technology that allows them to adapt quickly, get products to market in record time, and do all of it at a fraction of the cost of their incumbent counterparts, but that’s not why they are doing it. Their decision-makers are close, often knee-deep, in operational data, they are designed to handle risk or at least have a higher risk appetite, and they are passionate about solving a problem for their customers. And their culture reflects it.
Initially, this mindset may have worked against them a little at first. Consumers were happy to test new products in other industries, but when it came to financial services, they preferred to rely on the institutions they trusted. But Fintechs iterated and got better. Their “risky” solutions became more stable over time and, eventually, they were simply too good to ignore. They started to win the trust of consumers, at least partly.
This dynamic is reflected clearly in the state of retail banking today. We have large incumbents spending millions trying to get their products digital, competent challenger banks (read: alternatives) spinning up everywhere, and we have consumers with one foot in both worlds: for the most part, they don’t trust challengers with their salaried accounts, but they don’t enjoy the experience of incumbent banking enough to use them on a day to day basis either. So consumers end up moving spending money from their salaried bank account at the incumbent to their spending account at their challenger.
This isn’t sustainable for either side: challengers are struggling to make a profit because credit is easier to give when you have access to a customer’s salary and, let’s face it, credit is what puts bread on the table. Incumbents, on the other hand, are struggling with customer satisfaction and access to transactional data.
Which brings me to the last misconception. It’s easy to pit Fintech and Incumbent banks into this winner-takes-all fight to the death, but that is usually not how reality works. Reality is far messier than we make it out to be.
Fintech and banks can work together. Indeed, they should. There is a huge amount of opportunity there. And in the last couple of years, we have seen this happen. Larger banks are starting to see the value of working with innovative startups and those startups are seeing the value of having access to a large customer base.