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DIGITAL BANKING Tips - Tip 31: DISRUPTION: Friend or Foe of Banking?

Have you ever heard the story of the six blind men who tried to find out what elephant is? Probably you did. In this story, these blind men have no idea what elephant is, decided to touch to understand what it is and depending on which part of animal they touched – they described the elephant. All thought and insisted that they are right in their definitions, argued with each other. Then a wise man came and told them they are all right and the reason of the problem is they all to touch different parts of the animal. One way or another, there was a need for a wise man to address and solve the problem – otherwise blind men could continue this discussion forever. Let’s bring that old story from the past and adapt it to the present, use an analogy – in which “banks were the blind men, customers (esp. millennials) are the elephant and Fintech is the wise man. By the way, the name of this story is “Digital Disruption to Banking” – is it good or bad, you decide! 

We all know well that recent technological advancements created two groups of segments in society as Digital Natives and Digital Immigrants. Digital Natives are mostly Millennials, who have different banking habits and expectations compare to previous generations. Millennials eat, sleep and breathe with technology and we cannot serve them in the way we serve Digital Immigrants. They are quite ready to leave the banks if another favorited party can provide the banking service. So they do not need banks, they need banking. Banks do not look like ready for Digitalization mostly, as the current capabilities available do not match with the requirements of new economy including fast to market products, analytics, social media management, mobile adaptation etc.  

If there is a better way to service banking clients, then should not we welcome it?

Digital disruption can be an opportunity for financial industry, rather than a threat - if the banks & other financial institutions have been doing the right moves, at right time. Almost everyone agrees on the magnitude of the change in Finance and Banking industry in recent years. Then the questions come as; how can we adapt, what it takes to survive or what are the new rules of the game.  

Understanding the change, now or never:  

Mobile Revolution, Big Data & Analytics, Social Media, Cryptocurrencies and Open APIs set up the stage for Disruption. From now on, Other than welcoming the change and trying to adapt the changing conditions, I cannot see any other viable option to survive in the “new normal” of banking. Banks should develop their innovation capabilities and be ready for any partnerships in order to go beyond their existing limits. By the way, this is not only about creating innovative products – banks should also be very agile for creating fast to market products and reduce the cost in whatever they do.  

Everything has been changing so fast and this change influences the way we do our business. If we understand the change, I mean what would be different in banking and how we can adapt to that then we can use this change in order to improve our businesses. Innovation is a key success factor and not necessarily requires lots of money or resources (unless you are an R&D company) – rather using what currently available.  

Occasionally I think to myself, there are many bright finance professionals just trying to understand what would be the future of banking and ignoring what is going on at present. Understanding “where we are now” is not less critical than where we are heading to. In addition, it is important to note that unlike some believe, not everyone has the same resources to create the "best in class" Digital Banking Experience but this does not limit us to improve the user experiences we provide or opportunities we create.  

It is obvious that the existing banking systems have NOT been designed “Digital in Mind” – so all the digital products/services that should be available at Digital Channels hit the wall due to clumsy backend systems. For example, if you silos in your backend – how are you supposed to get 360-degree customer view to predict the next best action of the client. Sometimes “what you have could be greater obstacle than what you do not” to achieve what you want. This is the dilemma many banks experience as of now.  

Changing Customer Behaviours and Expectations:  

Changing customer behavior and expectations requires new business models and new interactions. Everyone agrees with the idea that banks should be where the customers are, however, in practice, there are some difficulties to understand what to do on the bank side, or let’s say how to adapt. This creates a gap between what customers expect and what banks provide. In addition, the way banks use data creates a single vision of clients - rather than the 360-degree of a client, which digital companies have.  

Some researches and articles say that Banks has been losing both money and customers’ trust for the recent years. Plus, as response economic crisis experienced before, Regulations has been getting tighter, customer protection laws are much stronger and financial movements are closely monitored & directed. Then the question how can we survive, ideally grow in this environment?  

There is an urgent need to stay relevant to the customers, easy to say – hard to do. Unless customized user experiences provided by the banks, there is no way to win this trust and business back.  


If you have a look to the figures that shows how much investments Fintech companies get in recent years, esp. the last year – you can easily conclude that these companies would be in the banking landscape as strong players. Some estimates say that Fintech companies’ disruption to banking will be around $470 billion in the coming 5 years. There are other reports that have been talking about 35-50 % market loss for banks against Fintech Players in the same period. Therefore, in my opinion, one way or another, banks will have to communicate with Fintech firms – when this “ignoring them” period is over. As of now, at least everyone agreed that Fintechs do what banks do much more efficiently in less costly way.  Payments and Lending are the two areas, which are very attractive to them.  

In addition, it is necessary to note that we cannot say all Fintech companies have the same business model. If you have a detailed look what they do, you may easily see that some has been targeting the clients – banks do not care, some focus on the most profitable clients of the banks while some others just work on some functions rather than clients. Of course, there are some using the bank services as an input, add value and re-sell them to the clients as intermediary. In addition, the unique group of them has been working on some products/services that might change the overall banking practices. I think this is the most promising group of all!  I am very surprised to see the total number of patent applications done in banking/finance industry, sure not as much as in pharmacology but still huge.  

Setting up some Innovation Labs/Centres or creating innovations groups are what some banks do in order to understand and respond the change digital disruption. The critical point is, whatever produced in such initiatives should not be subject to the bureaucracy of the bank – otherwise the positive impact would be very limited. It is obvious banks need to know which clients they should be after, for many years wealth-based segmentation has been used to categorize the clients and it does not work anymore. Time to try new business models and customer segmentations. By the way, not only Fintech Companies but also Technology Companies, Telcos and Retailers can also be threats to banking.  

There are more than 7 billion people living in the world, but only 500 million banking customers. Considering that estimates say only 17 % of the adult population is banked, then banking still has a huge potential to use. It might be good idea to target the unbanked population for some banks. For the others, creating new services and discovering new revenue streams together with operationally efficient business models is a matter of survival.





Comments: (1)

A Finextra member
A Finextra member 01 December, 2015, 14:27Be the first to give this comment the thumbs up 0 likes

Hi Tolga, Nice to read your interesting article.
This reminds me the famous "Uncertainty Principle" or observer effect, where each has their own way of viewing things. Every thing in flux and very difficult who is blind and who is wise, may be too early to decide.
It would be very difficult to welcome the change when the investment decisions are still follow the conventional matrics of ROI of business breakeven. I do not think it is ideal to compare them with the present Fintech Unicorns.
But instead of holding a "Me Great" attitude it is better to collaborate in order to bring out the best of both world and follow the prudent investment principle rather than drying up the investible resources itself. Please share your thoughts.



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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

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