Fintech approaches: Why banks need to change decision-making process

The line between fintechs and banks is increasingly blurred for customers of financial services. However, for this particular industry, both players are split by specialization and segments, and despite the polarity, traditional banks have a lot to learn from innovative financial companies.

The key difference between banks and fintechs is the speed of decision-making. In a traditional commercial bank, to adopt a new financial service, you first need to approve the project, initiate a legal tender, write technical documentation, and agree on the final solution with various departments. This process may take about six months.

In comparison, within most fintech companies, these decisions are much more streamlined since they can be made instantly at the stakeholder’s level with a single phone call allowing the project to launch immediately. This advantage allows fintechs to be more competitive, innovative and faster than traditional financial sector players.

One of the reasons for the banks’ red tape is that the European Central Bank encourages financial institutions to have a complex vertical structure to avoid risks. This requires banks to be made up of many different divisions, including a Chairman of the Board, Board of Directors, and Supervisory Board, amongst others. The issue is that only these bodies have the right to make decisions on activities within the financial institution, and each has its own area of responsibility. Therefore, the final decision becomes a collective verdict of all the bodies involved, meaning that gathering everyone to make a significant decision about launching a new product or changing a strategy is still a challenge.

The need for a new organizational framework for banks

Nevertheless, this has been standard practice in banks for nearly 50 years now. Today, as we experience a fourth industrial revolution and accelerated digitalization linked to the COVID-19 pandemic, there’s a need for a new framework; a set of concrete principles that banks, together with the regulator, can include in their product development and innovations strategy in the banking industry.

This framework will be most effective if the regulator will freely give banks the opportunity to have a different, more decentralized structure allowing decisions to be made quickly regarding innovations within finance and business infrastructure.

Of course, not all banks are rushing to innovate. As it stands, new features or services only tend to be added in response to competition, once they’ve become mainstream in the market or after a new product has already been tested by someone. However, those banks that want to remain competitive for their customer should change this logic and way of operating.

Bank and fintech collaborations

With the growing demand for online payments and changing consumer habits due to the pandemic, we’ve seen the number of partnerships between banks and fintechs grow substantially as they benefit from each other’s services. Fintech companies provide banks with a state-of-the-art platform for reaching new customers, whilst banks, in turn, provide their infrastructure to facilitate the scaling up of fintech companies.

Even if the bank has a long history of stability and reliability, partnering with a fintech company means it doesn’t have to spend months on the integration, onboarding, and due diligence etc. Therefore, financial institutions should prepare for partnerships both organizationally, technologically and legally, all of which require flexibility.

Banks that offer fintech companies their infrastructure may also need to improve their processes. If a fintech company wants to integrate with a bank with outdated infrastructure (i.e. to open accounts), they may only be able to provide their services for a few more years. This could lead to fintech companies turning to a bank competitor with more innovative infrastructure and business approaches.

Organizational design and its modernization

As you can see, the organizational structure is the foundation of decision-making. The granularity of the organizational structure and the ability for certain individuals or teams to take full responsibility for decision-making is an approach that banks should learn from fintechs.

Large banks may decide to divide the organization into two parts, of which half consists of the old structure that was arranged vertically, whilst the other half could be broken into teams grouped by their operations. Each team must clearly define their area of responsibility and have the decision-making ability in order to implement them. This is what organizational design is built on. Innovative teams using this principle operate quickly and are able to successfully create and bring to market new products.

For fintech companies, everything is much more straightforward, as they often grow out of small innovative teams that developed in a horizontal structure within the organization.

This approach in changing organizational design is appropriate for systematic transformations, however, it should be noted that if we’re referring to the digitalization of the banking sector, it will need a complete reboot.

According to Pentti Hakkarainen, Member of the Supervisory Board of the ECB, the strategies that forego investment in innovation and instead focus on short-term fixes for legacy IT systems will cost banks dearly. To succeed in the race to digitalize, banks also must continuously invest in building skills and expertise in the use of new technologies.