The FinTech Opportunity for Banking
INTRODUCTION & BACKGROUND
“The banking industry is done for! It is ripe for disruption!” Sound familiar? Ever since James Dimon (JPMC’s CEO) issued the dictum, “Silicon Valley is coming,” such talk has been doing the rounds in scores of corporate board rooms and worrying bankers in their sleep. Fin Tech is coming whether banks like it or not, but can’t they profit too?
In order for the banks to take any advantage from this development, it is indispensable to understand what, after all has created the opportunity that Fin Tech startups are leveraging. The changing demographic where millennials are maturing to adulthood, lower barriers to entry, data-analytics’ advanced capabilities, new channels to access services and changing perceptions of the financial sector have all contributed to the shifting industrial landscape. Aside from these externalities, the banking ecosystem’s legacy processes, historical organizational structures and outdated distribution infrastructure has created an archaic operating model.
The financial tech junta is tapping this opportunity by targeting specific service offerings that have for long remained the prerogative of banking institutions. This is leading to what is being described as the “unbundling” of banks, whereby their services are being poached by tech-startups. However, what is noteworthy here is that the shifts induced by fin tech pertain only to the sales and delivery of services. Indeed, it’s the trend of smart customer interface that has exploded during the past few decades, with facebook, amazon, uber, snapchat and the like that is being extended in this sector. The capabilities that fin tech startups are shying away from include compliance, capital holding and transactional processing. These are hard to replicate central banking competencies that require, either massive amounts of expertise or infrastructure, and lie at the core of these institutions.
RESPONSE & HOW TO PROFIT
Banking establishments have been slow to respond to these changes but, after the usual bouts of rejection and denial, the realization has seeped in and they’re making it a fight for sustenance. As the tech companies chip away on the banking practices, speculation is rife with banks being reduced to “infrastructure providers,” if not being annihilated completely. However, it is unlikely, from a reasoned perspective that banks will disappear despite sovereign and international regulations which are expected to start targeting the fin techs.
Let us look at potential four ways in which banks can advantageously tackle this barrage of fin tech providers:-
1. Collaboration: As it happens, various established financial operators have started working with insurgents. A recent development has been the exploitation of startup ecosystems by the banks, to source fresh innovations. Since 2010, dedicated financial tech accelerator programs have been coming up in key markets around the world, and lately there has been a trend of corporate supported and/or sponsored accelerator programs, using which the incumbents are scouting for innovation providers. Furthermore, some other are going the VC way or initiating in-house labs for coming up with digital solutions.
Synergetic associations could potentially be explored in the acquisition and servicing of customers, as well as the packaging and delivery of solutions, where fin tech companies are more innovative. Other areas would include the sharing of information through API, connectivity and large-scale customer experience, where banks have considerable expertise. However, history shows that alliances seem less likely, unless the institutions are unavoidably large or have unique capabilities that are crucial and indispensable.
2. Assimilation: The traditional institutions could also absorb the utility and solution package of fin tech startups into existing services, so as to create digitally enhanced offerings. This would either happen through synergetic acquisitions or developing in-house capabilities for such solutions. In total, fin techs have been involved in almost 900 deals with other market players over the previous two quarters, while traditional financial players have created a trend of developing proprietary infrastructure. In the advisory services space, Schwab and Vanguard have both launched much discussed robo-advisory services that rival the new entrants. Also, DBS Bank of Singapore announced the integration of IBM Watson’s cognitive computing and advanced capabilities into its wealth management practice, with subsequent extension to its retail services. In the trading and investment ecosystem, JPMorgan Chase and Goldman Sachs have dipped their toes into the water with Motif, a startup providing thematic investment opportunities with customized stock-baskets. Schroders PLC, the London-based asset management company with a legacy of over 200 years, has backed the online wealth manager Nutmeg.
3. Neutralization: Another option for traditional establishments, albeit caustic to the tongue, is curtailing threatening insurgents though takeovers. These could entail digesting the innovative capabilities within the bank or neutralizing the same by recourse to market dismantling and/or legal options. This may seem harsh or uncalled for, but it does happen and is used by many when the viability of an established business-line is being questioned.
4. Exploration & Acclimatization: Since fin tech forays are presently heavily focused on customer interfacing and creating better experiences, it would make sense for banks to dig deeper into the critical functions left untouched. This would allow them, not only to intensify these core operational functionalities, but also stay ahead of the curve. Let’s take one example: banks have privileged access to capital holding expertise. Excellent! Taking cues from the opportunity exploited by fin tech companies, banks could leverage their understanding to explore newer ways of taking deposits that gels with the service expectations of today’s customers. There can be several other such opportunities. Therefore, banks should explore models that preserve such capabilities but allow it to set a trajectory for digitally automated service offerings that build on new market realities.
At the extreme end of the fin tech spectrum are advances that have yet to find a mainstream application, including digital currencies such as BitCoins. If traditional financial institutions can capitalize on these, we could be witnessing disrupting trends from inside the industry. Also, banks could explore the possibility of leveraging digital capabilities in product processes other than sales and distribution, which seem to be the core areas of focus for fin tech startups. It might even be worthwhile for banking establishments to explore the possibility of accepting the ‘unbundling’ trend and creating targeted solution-centered spinoffs that operate like nimble startups, allowing them to be more flexible and embrace market trends.
The concept of a ‘primary financial institution,’ which provided for a one-stop-shop with its local presence, is being superseded by that of specialized ‘primary financial applications,’ facilitating targeted services. The future of the banking industry is bound to see major overhauls in regulation, apart from front-end operations which makes for noticeable friction. If regulation agencies are unable to facilitate a level playing field, it wouldn’t be surprising to see banks moving the fin tech way and willingly ‘unbundling’ their own services, in the way illustrated by Moven and Simple. Now, the fight is over customer interface and it could lead to opportunities for repackaging the ‘unbundled services’ into compliant, secure and seamless integrated wholes. So, another big opportunity that seems to be on the horizon is service aggregators. Aggregators and information providers could add another layer of opportunity, on top of the new age Fin-Tech companies. It is the customer experience that is being reworked in new ways and, if (even some) banks are to become infrastructure providers there should be ample opportunities for creating new solution offerings or transforming into specialist professional servicing agencies.