There is rapidly increasing competition from digital challengers focused on specific verticals across the array of products and services that large legacy banks provide. From retail and investment banking to consumer lending and wealth management, a new and growing generation of fintech platforms poses a significant threat to the traditional banking industry’s bottom line.
It might seem that banks are being assaulted on all fronts and need to fight back, but warfare is not necessarily the answer. Legacy enterprises possess strong advantages that new players don’t – namely, scale, brand awareness, and access to substantial customer data. Can these strengths be put to work in partnership with the agility and customer focus that fintechs bring?
“The biggest challenges are the huge infrastructure of branches, technology, and processes that legacy banks have, as well as a hierarchical structure for decision making,” says Jonathan Donahue, VP and strategic growth leader for fintech and banking at WNS Global Services – a leading provider of business process management solutions. “There is also the need to comply with regulations that protect them from incurring excess losses, do things that are consumer-unfriendly, and prevent them from responding quickly and being innovative.”
“The challenge is that they cannot move as fast as they would like to, because they are held back by legacy infrastructure, and things take a long time to change,” adds Alexander Hillman, SVP of banking and financial services at WNS. “An additional challenge is talent. Banks need different sets of skills in the digital space. Everyone is fighting for the same talent – and fintechs tend to pay better.”
Can partnership trump competition?
Banks have responded to the challenge by significantly improving customer experiences, introducing online and mobile banking apps, and boosting the number of transactions such channels can handle. Despite their efforts, it hasn’t been easy to match the digital experience provided by platforms born and developed in the cloud.
“They are not as elegant as competing fintechs, which usually start with one specific product,” agrees Donahue. “That is why we are seeing many acquisitions of fintechs by banks, as well as partnerships with fintech platforms to leverage the loans that banks can fund from their balance sheets.”
There are also internal organisational changes that are helping banks create a better digital platform.
“Five years ago in financial institutions, you didn’t have a chief digital officer or a chief innovation officer, but they are bringing talent into this space to address digital transformation,” says Hillman. “They are tasked with finding ways for banks to do things better, faster, and in a way that is more appealing to the new marketplace. The answer often lies in fintech partnerships and acquisitions.”
The partnership option is increasingly attractive, at least to banks, because it provides a shortcut to cutting-edge technology without the time and expense of developing an in-house platform.
“Banks building everything on their own risk creating an experience that customers don’t want,” says Donahue. “Working with fintechs to create a platform they can license can reduce that risk.”
“Cooperation is more difficult in areas where fintechs overlap and compete for the same clients,” Hillman adds. “Some banks decide to license such technologies and white-label them to their customer segment, so there is more cooperation and co-creation in that area. But it is expensive.”
An era of mass co-creation
This begs an important question: what’s in it for the fintechs? In some instances, they approach banks to co-create a new offering. A fintech might create an amazing consumer-facing app, for example, but it could lack the necessary banking infrastructure for it to work. For such back-end services, they can reach a deal with banks to create a successful model.
In its efforts to offer fintechs new pathways to scale-up operations, WNS recently launched FINSIBLE, a modular suite of banking solutions designed to enable fintechs to efficiently manage, streamline, and scale operations. By partnering with WNS, fintechs can co-create solutions that deliver robust operational control and governance, cost optimisation, regulatory compliance, and fast-track digital transformation. Fintechs can create the technology stack while WNS provides the people strength that a sponsor bank’s back office typically delivers.
Partnering opportunities abound, so could we soon see the dawn of an era of mass co-creation?
“To some degree, I think that it is time for this to happen,” believes Donahue. “We’ve got modular technology, and people are using the same platforms. There will always be a stage when the channel through which companies serve their customers must be unique and provide a competitive advantage, so I don’t think that can be co-created. But it makes sense for banks to use more common platforms rather than building their own. You can’t keep building proprietary technologies.”
“I think that in five or seven years from now, everything will look different in terms of how financial services, in general, are consumed, or products are offered,” says Hillman. “These days, you don’t even need your card anymore; you tap your phone. Soon there will be a huge change in the front end, while behind the scenes, there will be more cooperation, with everything being tied together.”
Banks will have to play to their strengths to make these co-creation efforts work. Incumbents enjoy brand recognition, are seen as safe custodians for deposits and have the scale to reach a large customer base. Also, they have a broader range of products and services than any fintech can offer.
“Fintechs can eliminate the friction for two or three products, but they can’t provide the entire banking experience,” notes Donahue.
Marry the agility of fintechs with the stability and product range of legacy banks, and you might just be looking at the future of the banking industry.
To learn more about opportunities for co-creation, download Helping Fintechs Soar: Driving Value Constellations in the Era of Partnerships