Fintech startups are arriving on the scene touting advanced technology and better rates to grab market share from traditional financial firms like banks and brokers, but that doesn’t mean that the incumbents are sitting ducks and can’t battle back. In this week’s Fintech Spotlight, we connect with James Haycock, whose firm Adaptive Lab provides digital consultancy services to banks and has literally written the book on strategies banks can use to improve their consumer facing technology.
A real threat?
One of the questions we have had at Finance Magnates is just how real the threat of fintech startups such as marketplace lenders , digital banks and robo-advisors are to existing financial firms. Even as assets under management and P2P lending transacted by startups are talked about in the billions and not millions of dollars, they remain a drop in the bucket of the overall consumer finance pie.
None of the banks we see are going to be disappearing soon
Answering, Haycock stated that, “none of the banks we see are going to be disappearing soon”. But, he explained that the correct question to ask isn’t about the immediate threat but whether “bank executives running these large businesses should be taking notes and learning about their new competitors”. To this question, Haycock answered a resounding “yes”.
Haycock explained that even though we remain in the early stages of change in the financial sector, these startups are growing quickly. For example, Haycock cited that the UK was on track to record over £4 billion in P2P lending for 2015. While still a small number compared to the UK’s overall lending market, growth is accelerating rapidly.
Haycock explained that these trends reveal that consumer awareness of having more choices to conduct their financial transactions is increasing. Therefore, although it may take time for the general public to become familiar with alternative finance products, awareness is increasing rapidly.
Assuming a firm understands that there are changes in technology and consumer banking habits, which often may take years for a company to accept, the next step is creating a digital strategy. Haycock explained that firms need to first conduct an internal audit of their business. Not necessarily in the financial sense, but of what areas of their business do they want to incorporate change. According to Haycock, a financial firm might find areas of their business that aren’t that important, and therefore not worth the human can capital investment to evolve.
Upon singling out areas that a bank should take on a digital transformation to prevent disruption, Haycock stated that he believes firms such as banks should create a ‘digital’ version of their business. For example, rather than Acme Bank adding online everything to their services, they gradually add digital services, but launch a separate Widget Bank brand. This entity is then the digital beta bank operated by the parent Acme Bank.
According to Haycock, the advantage of this method is that “businesses really struggle to deliver change”, and, the separate entity that is funded by the parent bank can have its own culture and methods to service customers. With the new entity in place, the parent bank can then begin to slowly introduce customers to the beta bank. Haycock explained that for banks, having a large existing customer base provides them an advantage against startups. Therefore, they need to leverage this advantage by providing an efficient method to migrate to the beta bank if they so choose.
Among examples of firms using this model is Santander’s Openbank. Operating as a digital bank in Spain, the unit has been at the forefront of Santander’s fintech banking strategy and works with startups to integrate innovative solutions to their customers.
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Proprietary vs licensed technology
Another important question faced by banks is whether to purchase an ‘off the shelf’ digital platform to serve their customers, or develop proprietary systems. Haycock answered that he believes “that banks should own their own interface”. Therefore, he advises firms to ideally build their own full stack to differentiate themselves. As an example, Haycock cited UK banking startup, Mondo, which has built a platform from the ground up based on providing a digital solution to customers who hate their banks.
Although not every bank has the expertise or capital to develop their own full stack systems, Haycock stated that as an alternative, they can “take an off the shelf platform and build their own front end”. The benefit is that banks can still ‘own’ their front end interface that is experienced by customers and tailor it to fit their needs, as well as being unique from competitors.
Beyond the costs associated with adding digital services, another financial factor is that a bank may find that their customers become less profitable after migrating from their full branch accounts. Haycock explained that firms “have to think longer term” and realize that “environment is changing and things are only speeding up”. The result is that banks are operating in a sector with “irreversible trends” such as lower costs of entry to digital competitors and changing consumer habits.
For brick and mortar banks, this means that there is a need to reevaluate whether their current revenue models are consistent with future trends. If they aren’t, then internal cannibalization and costs to build digital units could provide superior long term results.
Bundled to unbundled
During the Bank Innovation Israel conference, when discussing the future of fintech, Eileen Burbidge, Partner at Passion Capital and UK Government Fintech Envoy and Chair of Tech City UK, stated that an important trend she was seeing is ‘modular’ finance. As such, rather than customers being served bundled services from individual banks, there is greater availability to pick and choose products from different companies.
Asked whether customers are ready for the unbundled approach after years of interacting with banks and their bundled models, Haycock answered positively. He explained that “People are doing this somewhat already, going to product aggregator websites to find the best prices”. In finance, examples of sites include those for mortgages and credit cards. As such, these consumer trends favor fintech startups which are focused on a smaller array of products and banks can’t just assume their customers aren’t shopping around.
But can there be a co-existence between fintech startups and traditional banks? Beyond cases where banks have tapped startups to license their technology such as for handling cyber security, data management and mobile apps, there has also been multiple cases of banks collaborating with marketplace lenders.
Haycock summed it up that “banks have brands and customer base, but startups have the innovation”. Therefore, for startups there is an opportunity for them to concentrate on individual products and make them great. Banks can then benefit by leverage their client base and referring customers to fintech startups offering ‘best of breed’ products that the bank doesn’t specialize in.
Fintech Spotlight is a new column on Finance Magnates devoted to reviewing innovative financial technology companies and sector trends.