How Banks are Reacting to the Challenge Posed by FinTech
As financial technology changes the face of the banking industry, what options are on the table for banks?
Financial technology companies are quickly transforming the banking industry. Beginning with payment methods, fintech has disrupted every aspect of banking operations. Even areas that were previously thought to be insulated from such threats are witnessing intrusion. Among areas being revolutionized by small tech savvy businesses are capital markets, regulation and risk, trade finance, wholesale banking and asset management.
The market share that fintechs will eventually claim is yet to be seen, but, nonetheless, they have completely changed the business landscape for financial services. Building an entire digital structure for banking from scratch has allowed fintech companies to notice and improve upon any operational loopholes in the banking system. This has led to eye opening realizations for consumers which has increased their expectations from any banking experience. Digital brokerages have changed customer expectations regarding brokerage fees. Retail foreign-exchange fintech companies have shown customers that they don’t have to pay retail FX margins. New retail banks are showing customers that a digital-first banking experience is possible.
Given the situation, what are some of the ways in which traditional banks can react? Here are some ways in which banks are stepping up to the challenge of digitization of the banking sector:
- Partnering With a Fintech
If the partnership is designed carefully, a bank can benefit extensively from it. Faster processing, cost-reduction, smoother operations and a bigger customer base are a few of these benefits.
- Buying a Fintech
Amongst the biggest and most successful fintechs, strategic thorough-cycle M&A has proved to be a powerful growth hack, in spite of high valuations. Incumbents can have multiple reasons for buying a fintech company; among these are the company’s customer base, UI/UX, data capabilities, expert team, etc. But, the real test of success is how well the two entities can integrate after acquisition.
- Investing in Fintechs
A good way to start exploring the fintech landscape and to get some cover from technological disruptions is to invest in fintech companies. A good place to start is fintech companies that are already a bank’s partner or provide similar services to that of the bank.
- Transforming Themselves Into a Fintech
Digital transformation is difficult but it is the need of the hour. Some of the steps that banks can take to make this transition easier are: simplifying and compartmentalizing core infrastructure; making operations more agile; upgrading technology and upskilling employees.
- Facilitating Fintechs
Some financial institutions are reversing the game by creating to-scale, smart white label technology solutions for fintechs, enabling them to embed financial services in their user interface. The success of this model, called ‘banking as a service’, depends on finding a mutually beneficial relationship between the incumbent and a fintech. These white label financial solutions can also be sold to retailers, telecommunications companies and other tech companies.
- Launching Their Own Fintech
Although it is difficult to compete with companies that have been launched as tech ventures, if incumbent financial institutions are to continue to enjoy their edge in the market, this has to be done. To succeed, an incumbent must emulate tech companies and be agile, fast, and hire the best talent out there. An incumbent can leverage their existing expertise, customer base, infrastructure and capital to beat fintech companies at their own game.
- Ignoring Fintechs
Although ignoring new competition is not a good choice, if their business occupies a niche or is difficult to disrupt due to tight regulations, a financial institution may choose to do so. A company can make an informed decision about the need to tackle or ignore the threat of disruptive technology based on its priorities and needs.
- Going For a Hybrid Approach
It is seldom that a simple choice between the above mentioned options is the answer. More often, a hybrid approach is needed to deal with the complex challenge posed by fintech. Although every incumbent requires a unique hybrid approach, chosen after careful planning and implementation, a general trend has been a move from partnerships and internal transformation to an exclusive focus on internal digital-business builds and M&A.
Every financial institution is unique and requires a customized approach towards disruptive technology threats. One thing an incumbent cannot do is to refuse to see the imminent encroachment by fintechs upon their value pools. Fintechs laced with increased digitization and operational efficiencies are the natural answer to heightened customer expectations.
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