No industry is safe from the fast march of digital progress, and the banking sector is no different. In Europe alone, well over a thousand fintech companies have launched in the last decade and, as of 2016 according to Accenture, these same fintechs make up almost 7% of the industry's overall annual revenue.
Add to this the fact that the big tech firms are making their own waves in the financial services sector, with Amazon and Facebook both dipping their toes into the pot, and it becomes clear that fintech is a legitimate looming threat to the 'old ways' that we've all become accustomed to. As Accenture financial services leader Richard Lumb says himself: “The message is out there that new digital players are in town and the banks are under attack.”
Sweeping technological change has presented a competitive threat to banks across the globe and many of those banks are responding to this threat. However, whilst top-tier banks are certainly doing their part, it's the tier 2 banks that are really leading the charge.
“Technological innovations will be the blood of the banking industry for years to come and if big banks don't make the most of it, the new fintech players and large tech companies surely will.”
David Brear, former head of the UK Digital Banking practice for Gartner Consulting
With so many potential fintech threats waiting in the wings, the offence is the best form of defence. In order to meet these threats head-on, many legacy banks have launched their own digital platforms, which offer the convenience and power of fintech solutions coupled with the security of a name that people know and trust. Top tier investment banks like Goldman Sachs have made tangible advancements, with their Marcus platform generating over $1 billion in revenue and offering the highest interest rate in the UK. Singapore's largest bank DBS has also launched a number of mobile-first banks in the APAC region in recent years (including India's first mobile-only bank), signing up over 2.6 million people in the process and outperforming European rivals like Barclays.
It's the tier 2 banks, however, that have been making real fundamental concessions to the fintech threat. Because it's the tier two banks that arguably have the most to lose. TD Bank was the first bank in Canada to launch a chatbot and even created its own Amazon Alexa 'skill' to allow customers to the bank by voice. Indeed, AI is one area where legacy banks have been more aggressive. Accenture’s Banking Technology Vision 2017 report found that four in five bankers believe that AI will “revolutionise” the industry. As Accenture’s banking practice chief, Alan McIntyre notes: “AI gives people the impression that the bank knows them a lot better, and in many ways, it will take banking back to the feeling that people had when there were more human interactions.”
In APAC, meanwhile, investment bank Credit Suisse decided to launch a digital private banking platform back in 2015 to give clients round-the-clock access to their accounts, bespoke trading tools and personalised market insights according to the user’s portfolio. These tools were leagues ahead of the digital applications offered by competitors in the region. Francois Monnet, Credit Suisse’s head of private banking for Greater China, said: “Clients’ experience, feedback and usage of the digital platform so far indicate that we have been able to meet their evolving needs for an integrated digital and direct channel experience.”
The most obvious move for banks that don't already have the existing infrastructure in place to launch their own fintech solution is to acquire a start-up that has already laid the foundations for a workable digital platform. This is comfortably the more expedient option. It's also killing two birds with one stone by turning a potential competitor into an asset.
Despite the obvious advantages of fintech acquisition, the top tier banks only just appear to be picking up on the benefits. Goldman Sachs acquired the team behind credit card startup Final this year, but overall, since 2013, 80% of the top 50 US banks have not acquired a single fintech startup. Indeed, it's a little further down the ladder that real developments appear to reveal themselves. BNP Paribas, for example, was rather prolific in 2017. It acquired its first fintech in April in the form of online bank Compte Nickel and followed that up in September by buying a majority stake in the robo-advisor firm Gambit.
The Canadian TD Bank, meanwhile, acquired AI prediction and personalisation platform Layer 6 earlier this year in a move that highlighted the ever-increasing importance of AI in modern banking. Swedbank also acquired fintech company PayEx in 2017. A privately-owned group that offers payments solutions for internet, mobile and commerce services, PayEx was purchased for an undisclosed amount by Swedbank, whose president Birgitte Bonnesen stated that PayEx was brought into the fold because she believes there is “great competence and knowledge” within the startup.
“In 2016, the average return on equity (ROE) for the largest 200 global banks was just over 7.1%. Banks can increase their ROE by collaborating with fintechs, which has the joint benefit of driving down cost while accelerating innovation.”
Matt Hatch, partner and Americas FinTech Leader at EY
Whilst some banks might not like the idea that tech companies are allowed to offer unregulated financial services, many more have decided to leverage this fact by partnering with their big tech rivals. In theory, these partnerships serve both sides equally well, giving the banks access to the technology and expertise of the fintech startups, and giving the startups access to the necessary capital to advance their operations. The big headline grabber is, of course, the potential partnership between Amazon and JPMorgan Chase; a fintech supergroup partnering the biggest bank in the US with the biggest online retailer in the world. There are, however, more subtle deals being made.
The key is in banks finding startups that will help them 'fill in the gaps' in areas where they might otherwise be lacking. The Spanish bank Bankia has teamed up with the invoicing platform Eurobits to digitise the invoices it receives from the 33,000 SMEs it currently manages. By using the Eurobits electronic system, Bankia was able to drastically reduce the cost of sending and receiving an invoice and was also able to reduce average payment periods. German bank Commerzbank, meanwhile, found that EU laws required their customers to physically sign up to the bank, which would make virtual signups impossible. They teamed up with IDnow, which was able to offer them access to a system that could verify customer identity via video stream. As a result, the bank saw a 50% increase in conversions.
Even fintech banks themselves are partnering with other tech companies to embolden their positions. Mobile-only bank Monese, for example, found that, without the expertise offered by a physical bank branch, they were struggling with their customer service, and they also didn't have the right tech in place to allow them to handle global transactions.
So, they partnered with AlphaBlues, which built a virtual assistant for them, and with CurrencyCloud to allow them access to an existing global payment network with up to a 10x reduction in forex fees. This helped the bank soar past the 1.8 million transactions mark. Many banks in Singapore have also partnered with fintechs to launch apps that use their publicly available APIs. Standard Chartered’s “Good Life" service, for example, provides its customers with an ecosystem of merchants that offer deals, alternative payment methods and reward-point options.
Diversification is always an option for banks that feel like their core business practices might be under threat from digital disruptors. Using the power of the brand to branch out into other connected areas can be a powerful tool, particularly when customers would prefer to keep all of their financial affairs in one place. The Royal Bank of Canada recently announced its intention to start offering a range of diverse services such as helping customers register a company or rent out their rooms on Airbnb, as a means of avoiding being sidelined by the likes of Facebook and Google.
In 2017, NatWest became the first bank in the UK to launch an automated investment advice service. The NatWest Invest online investment advice service offers fast, low-cost and fully regulated investment advice for its customers. It's a service that was developed, according to Managing Director of NatWest Premier Banking, Phil Northey, as a result of the fact that customer needs and expectations are changing, largely as a result of the options and services offered by fintech innovators. Northey explains: “At NatWest, we are very focused on meeting our customers’ needs and it is clear that too many of our customers are not able to get the investment advice they need. NatWest Invest will help our customers to get on in their lives and to achieve their financial goals.”
Other examples of banking diversification include the Commonwealth Bank of Australia, which has launched a Daily IQ tool to offer SMEs access to daily insights on its customers' spending habits. Barclays has also branched out into the field of cloud storage with its Barclays Cloud It service, which allows customers to store important documents on a secure server that can be accessed from any smart device or desktop computer.
“What is important is for banks to focus on customer experience and use technology and digital solutions cleverly. The risk is that banks don’t do this well enough and others do.”
Dennis Khoo, head of regional digital banking and strategic initiatives at UOB
With a sea change imminent, some banks are deciding to completely alter their business models in order to change with the times without losing custom. Many banks have turned to in-house digital transformation to smooth out the digital edges with comprehensive software suites designed to offer many of the same services innovative startups built their businesses and their brands on. Others, however, have gone a lot further. In some cases, that means launching an offshoot brand to run alongside the primary banking brand, as was the case with BNP Paribas, which launched the digital bank Hello Bank 5 years ago and attracted over 3 million new customers across Europe.
The Royal Bank of Scotland is also exploring the possibility of launching its own standalone digital bank, which is planned to trade under the name “Bo” and take on the likes of Monzo and Atom Bank. A spokesman for RBS said: “As part of the bank’s wider investment in digital and innovation, RBS is working on a range of projects to better serve our customers in the era of digital and open banking. One of the projects we are looking at is building a separate, digital-only bank for personal customers.”
In other cases, however, the changes are more deeply rooted. Many Asian banks, for example, are evolving their branches to keep up with the evolving digital needs of their customers by utilising tech to turn traditional bank branches into 'smart branches' and improving their online platforms. Jan Bellens, EY’s Asia-Pacific and emerging markets banking and capital markets leader, said: “Given that the popularity of branches as a distribution channel of choice is declining, their footprint is also shrinking in parts of Asia Pacific, as selected outlets get shuttered.” Bellens also cited an EY Global Consumer Banking Survey, which revealed that 41% want to interact with their banks online and 33% via mobile channels in the next 12 months. This shows that global customers are ready to go digital-first (eventually even mobile-first) and the banks that are willing to brace for that inevitability will be the ones still standing when the concept of a brick and mortar branch becomes little more than a memory.
Many tier 2 banks have underestimated the fintech threat. Indeed, even the Bank of England agrees as much, with Governor Mark Carney admitting that fintechs could disrupt the “stability of funding of incumbent banks” - potentially forcing the central bank to “ensure prudential standards and resolution regimes for the affected banks are sufficiently robust to these risks.”
Ultimately, if anything can be learned from the banks above, however, is that fintechs should be seen not as a threat, but as an opportunity. Peter Wong, deputy chairman and chief executive at HSBC Asia-Pacific, explains: “Fintech complements rather than threatens banking institutions. In my experience, banking has always been about technology, so today's fintech innovation boom represents evolution rather than revolution for traditional banking. It is supplementing and diversifying the existing financial system - not replacing or disrupting it.”
Banks have two major advantages over their more innovative fintech siblings; data and (perhaps more importantly) trust. Indeed, one report from Bain and Company and Salesforce found that “78% were willing to share with their primary bank, while 63% said they would share with another bank and just 43% would share with a non-bank.”
Banks should be using their wealth of data to build a more complete picture of customer needs. Couple this with the trust they have managed to develop over many years (and in many cases, decades) and they could not only be competing with their fintech rivals but beating them at their own game.
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