The future of the ‘business of money’ – the impact of the Fintech revolution

While the banks clearly have not had a first-mover advantage in the recent Fintech revolution, they have already begun to adapt, innovate and fund new technologies to bridge this digital divide and reap benefits

FinTechs across the globe have taken over the world by a whirlwind, making things a lot easier for end-consumers; may it be simple bank transfers or the most tedious processes of availing bank loans.

Since the ever-growing technology has increased the number of customer touch points for banking, the banks need to think beyond providing innovative financial products and competitive pricing. They need to develop new ways to interact and solve the problems of their customers. There clearly is a gap in customer expectations and traditional offerings of the Banks to begin with, a digital divide.

We have already gone through an early phase where Fintech claimed to make banks obsolete, then followed by partnerships (ApplePay, Paypal etc.) and collaborative approaches, engaging startups directly or through accelerator programs and using Fintech startups for ancillary services.

The future still looks bright for the Financial Service providers given their better positioning to take advantage of the evolving Fintech ecosystem. The next five years are very crucial in determining how the industry will shape up. While the banks clearly have not had a first-mover advantage in the recent Fintech revolution, they have already begun to adapt, innovate and fund new technologies to bridge this digital divide and reap benefits.

• Banks have started to build out upgraded technology platforms and streamline processes to the degree legal and compliance teams allow. 
• There are some obvious trends like blockchain technology, cybersecurity, and real-time payments that the banks have acknowledged and are focusing on.
• They are focusing on advice as a key differentiator, with traditional personal advice supplemented or completely substituted by digital advice based on algorithms. 

We have recently see a lot of banks setting up partnerships with the P2P platform providers as a viable models. It enables synergy since the banks utilize P2P credit platforms and platform providers relying on banks for sales channel:

1. The Royal Bank of Scotland’s partnership with Funding Circle and Assetz Capital.
2. The tie-up between US’s Titan and Congressional Banks with the Lending Club platform.
3. Bank Newport turned to Lending Club to regain their stake in unsecured consumer loans.
4. South East Asia’s largest bank, DBS, has signed an agreement with peer-to-peer lending platforms MoolahSense and Funding Societies to refer small business loans the bank turns away.  
5. Great Britain’s first P2P lender Zopa has teamed up with Metro Bank to combine P2P lending with “high street banking”.
6. Lending Club is partnering with Citigroup.
7. The Funding Circle and Santander have a partnership agreement to refer SME borrowers who don’t meet the bank’s lending criteria. 

Challenges that lay ahead of Incumbents

Banks see the biggest challenges to implementing digitization have less to do with innovation and more to do with culture, risk, and leadership. For instance, the banks immediately need to answer several critical questions around its workforce i.e. skills of both the front office and the IT personnel are required to deliver the new services, align the early career goals of millennials with the business models of the banks and retain/reward the new talent. At the same time, banks must determine how to deal with legacy technology and applications that is still mission critical, keeping in mind the fact that legacy technologists are retiring and being replaced by millennials possessing a different technology orientation. Thus retaining the knowledge that is walking out the door and incorporating it into training material for a younger workforce will be essential.

Some more key challenges that need to be addressed are:

• Identifying the critical skillsets that must be retained with internal staff and the tasks that can be delegated to external workforce.
• Empowering the organization leaders to drive results with a diverse workforce through digital toolsets.
• While the banks may want to differentiate their offerings and become bespoke, they will have to also think about how they can get standardization to scale, at the same time also keep innovating.
• Make the talent management functions like HR, a true partner for business. They become a coordinator, not the owner, to correctly identify and develop the workforce capabilities and agility. Millennials will need to be offered a career network instead of a career ladder.
• IT departments are getting smaller due to cloud computing leading to a convergence between IT and front office roles, making softer skills and the quality of personal interaction more important.

Conclusion

Banks see the above challenges as opportunities. They know that these challenges are not easy to address and it will take time to change. Banks see digitization to be truly transformational, and not being just superficial ‘shiny toys’ and hence, are taking baby steps.

Banks have a larger customer base that has been built over the years. They are no short of cash that allows them to invest in upcoming trends and ideas. Hence Banks should leverage concepts and disruptive ideas from fintech and attempt to adopt them into their mode of banking.

Fintechs for sure are changing the financial sector for the better and it’s time for the incumbents to catch up!

Authored by Pankaj Upadhyay, Associate Vice President, Key Relationships, Maveric Systems

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