10 years ago no-one would have thought that Microsoft could be toppled from a position of worldwide dominance in business software and systems. But just as it and other behemoths of the tech industry – Nokia, IBM, Blackberry - have come under sustained attack and have had to reinvent themselves, shrink, or both, as a result of the disruption brought by online business, it’s clear that banks will have to engage strongly in digital in order to remain relevant in the shifting economy.
But how easy is this for banks, who are usually very big, not that agile and unable to respond quickly to changing market conditions and emerging fintech innovation? This, allied with the threat posed by supermarkets and other new providers, means that the traditional banking industry itself could be at risk. How can banks address this, and rather than missing out, is the answer to making the most of fintech innovation, more collaboration?
Digitise the business, NOT specific services
Banks are aware of the need to change and are investing significant sums in replacing legacy systems, and working to upgrade capabilities so that customers can now do online what they once could only do in branch. The problem is that by digitising existing services, banks are simply doing what their customers expect of them: moving a service to a different channel.
The reality is that these developments are not as innovative as customers now require. Industry analyst group Gartner highlighted this in a recent (July 2015) webinar on Managing Innovation and Digital Transformation in Financial Services. They pointed out that while banks are busy digitising services, they should in fact be digitising the whole business.
Partnerships are the future
To do this though, is no small undertaking, and banks are not really structured to be able to do so on their own. The answer to how banks remain relevant and meet their customers’ changing requirements, lies in partnerships and collaboration. Working in this way not only makes the digitisation process much more straight forward, but it also allows the bank to offer more differentiation, very important in the face of competition from supermarkets and other market challengers.
So rather than trying to deliver such services themselves, perhaps banks should be embarking on partnership programmes, that look to identify the most innovative fintech and big data startups and bring them into the bank’s eco-system. Rather than seeing such companies as potential rivals, they should instead collaborate to offer customers a superior and differentiated service to the competition.
By their very nature, fintech startups are more flexible and agile than banks and can bring a product to market significantly quicker in most cases. They are also more used to innovating on a day-to-day basis, and there are many fintech firms in the UK alone that offer services to both businesses and consumers, that any bank would relish the chance to offer its customers.
Already, there is a growing list of banks that have started this process. For example, in the UK Santander has partnered with peer-to-peer lender Funding Circle. The bank refers SMBs with rejected business loan applications to them, and in return Funding Circle sends those SMBs needing banking services to Santander.
This move is indicative of a general acknowledgement that it makes little sense for a bank to build systems and software from scratch when fintechs have already done a lot of the hard work for them. The challenge comes when they want to assess and integrate multiple partners.
As banks explore numerous options, including collaboration and acquisition, one thing is clear, that in the past few years they have recognised the need for change. The next step is to embrace the disruptors who’ve brought innovation to the sector, and find the right partnership model in which to do so.
Martin Campbell, MD, Ormsby Street
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