Since the start of the pandemic, the shift to digital has been gathering pace across all industries. As remote working became the norm and physical distancing requirements came into force, organisations wasted no time stepping up their digital capabilities.
This is especially true for the financial services industry, which was in the midst of significant transformation even before Covid-19. The pandemic further accelerated these trends. Bank branches closed, consumers’ financial needs changed, and the appetite for digital-first solutions increased dramatically. In a recent survey by McKinsey, 42% of US consumers said they use at least one fintech, whether for banking, payments, investments, or lending. That figure is only headed in one direction.
The likes of Chime and Varo Bank enjoyed a surge in user numbers during the pandemic, as customers sought out new banking platforms that could meet their needs more rapidly. Chime’s valuation, which stood at $1.5bn in early 2019, had shot up to $14.5bn by late 2020. Ranked by the number of primary banking customers, Chime remarkably sits in seventh place in the US, ahead of US Bank and hot on the heels of Citi. Brex, which is disrupting Amex’s corporate credit card hegemony, has received $455m in series-D funding to help scale its operations to support significant growth in the fintech’s business services products.
For legacy institutions, then, the question is clear: how to augment digital capabilities and keep the threat from the challengers at bay? For WNS Global Services, a leading global business process management and digital innovation partner, this issue is becoming ever more pertinent. Senior vice president Alexander Hillman thinks that, while fintechs are unlikely to overtake the large operators in terms of overall scale, they are certainly stamping their mark on specific segments.
“The large operators currently cater to everyone – from low-income households to high-net-worth individuals, to SMEs to very large corporates – whereas the digital-only players are much more focused,” he says. “They may even focus on only one segment at a time. So, they’re not an existential threat to the legacy banks. But clearly, it’s an opportunity for fintechs to establish themselves because they can shrink the wallet share of larger players.”
Jonathan Donahue, vice president & client partner at WNS, argues that loyalty to the brand does not exist at a consumer level. Consumers pick and choose the credit cards and mortgages that best suit their needs – possibly from a wide array of fintechs – rather than sticking with one of the incumbents based on brand recognition. “Their size and scale do not make a dent, unless you’re talking about large corporations that would rather take a billion-dollar loan from, say, Citibank than from a niche player,” he says.
As a result, Donahue believes we are in the early stages of a fundamental shift in the banking market, akin to the change from high street retail to e-commerce that kicked off 20 years ago. Within the next decade or so, we are likely to see the emergence of the first “Amazon of the banking industry”.
“Right now, fintech valuations are high, and their growth rates are exponential,” says Donahue. “We will likely see some market correction and a crash, followed by a period of mass adoption. That’s when the CEOs of all the legacy banks will see that they have to defend themselves against these firms that are picking real share from them.”
Of course, it is not just the new generation of arrivistes attracted by the promise of becoming the next Amazon. Still, Donahue believes the restrictions of legacy infrastructure mean banking incumbents are more likely to emulate Walmart and Home Depot – successful brick-and-mortar brands that blend scale and preexisting systems with new technology.
“They would love to have a more flexible infrastructure, but it’s difficult to change those legacy platforms,” agrees Hillman. “Fixing an old aircraft carrier to make it fast-moving is almost impossible to do. The Amazon in banking will be one of the new banks coming up with solid capital backing.”
Build your own
A less cumbersome and cheaper route for the incumbents will be to build a digital offshoot from scratch. Goldman Sachs has done this with its Marcus brand, for instance, while JPMorgan did so less successfully with Finn. Some banks are looking to acquire niche capabilities from fintechs, while others are less interested in overhauling their systems and more inclined towards polishing their customer experience strategies.
“Maybe they’ll come up with some new sexy product and take online banking to the next level, even if there are challenges beneath the surface,” says Hillman. “They are also experimenting with no-code approaches – technologies that enable you to come up with a new product without writing a single line of code. That will get you to market faster and will probably work together with your legacy systems in a less intrusive way.”
He adds that CIOs must be key strategic drivers of their enterprises, adapting to a world driven more by products than infrastructure. “You have initial products coming to market day in and day out – how do you react to that?” he says. “Do you buy that product capability from a fintech that just produced it, or do you buy some new tools to be able to replicate it yourself?”
For the challengers, the issue will be keeping their cool as they move past the early hype stage, through the growth stage, and into maturity. Donahue points out that while he loves the flexibility, entrepreneurship, and responsiveness in the fintech space, many leaders risk losing that flexibility if they try to be too many things to too many people. In effect, they might become legacy enterprises in their own right.
“They’re going to start becoming more complex than necessary. Fintechs need to slowly evolve and grow with their customers as their needs develop, rather than throwing all these new products in the mix and trying to attract a different segment of customers,” he says.
On top of that, some may struggle with the pressures of going public and facing financial scrutiny for the first time. Others may fail to get the balance right between innovating and avoiding unnecessary risks.
“Digital-only players need to realise that they must build their partner ecosystem to manage their growth, both for scale and for maintaining good margins,” says Hillman. “You need to grow to that next level in a very cost-conscious way. There’s nothing better than partnering with someone who can provide you with that scale very affordably – it’s really what we believe in at WNS.”