For financial services, 2016 has been a year of continued innovation and disruption as new entrants have sought to challenge and in some cases replace traditional service providers. Fintech firms believe banks are constrained by legacy technology and post-crisis
regulations and so don’t have the time or resources to meet client needs through digitisation. Meanwhile banks believe that customers are distrusting of fintech companies because they are broadly unregulated and that they lack the ability to scale their offering
due to use of relatively unproven technology. The truth is perhaps somewhere in between whereby the future financial ecosystem will see both retain their competitive advantages if they accept that their future interests are likely to converge and embrace it.
To understand where this convergence might take place, it’s important to think about the competitive advantages of fintech companies and banks. For fintech companies, the use of modern technology to build user friendly client interfaces is their core strength
and because they don’t own the underlying infrastructure, they can give a better user experience than that provided by banks.
Banks on the other hand have long lasting relationships with their clients, they are regulated, and they have deep knowledge of the global financial infrastructure.
As such fintech firms and banks can leverage each other’s competitive advantages to retain their value within the chain and build scale in the financial ecosystem.
In the past, banks have controlled the entire value chain and the total technology stack supporting it but as the value chain has unbundled and the technology has quickly developed this approach has become unsustainable.
As a result, banks are beginning to realise that unbundling their value chains is a must and that they can focus on what they do best by leveraging the innovative solutions of fintech companies to better service their own clients.
Before doing so they must do two things. First, they need to establish their core competences which, perhaps surprisingly, is where most banks fail. This is because many identify the whole value chain as ‘core’ which can make it extremely difficult to identify
Second, they need to develop an IT platform which can integrate with external platforms. Currently, a large number of banks’ IT systems are running on legacy infrastructure and are unable to integrate with the financial ecosystem. Replacing the technology
stack along the entire value chain can be costly and takes time but by deciding which parts of the technology stack to own itself and which to outsource it can upgrade its technology more cost effectively.
Once banks have addressed these two components they should engage directly with customers in their ‘core’ competences, and attract business from other banks and fintech companies in that core area. This benefits the bank due to lower unit costs, especially
if the bank lacks scale, and competitiveness, and the partner who deploys the platform. The same approach should be taken even in a bank’s non ‘core’ areas because ultimately costs can be reduced and customer service quality increased.
Moving forward, banks need to realise that digitisation is not so much an opportunity but a threat. And fintech providers need to realise that they cannot disrupt a bank’s entire value chain which has been built on a deep understanding of financial services
and of the customers who use them. For banks and fintech companies alike the future is one of collaboration.