The disruption caused recently by the emergence of a wide range of new financial technology (Fintech) players has been a huge jolt for the banking sector, and reminded traditional players that they cannot afford to be complacent in the face of these competitors.
The key theme behind many of these new developments is the notion of convenience. In a world where digital technology such as 4G networks and smartphones have engendered an attitude of always-on connectivity, the idea of having to wait several working days for banking processes to complete is unacceptable to many people.
For some consumers, even the idea of having to carry a payment card seems outdated when they can manage every other aspect of their lives through their phone.
The rise of the challengers
Therefore, it’s understandable why so many people are turning to alternative options to traditional banks, and this is expected to have a significant impact on legacy brands.
For instance, an analysis by Goldman Sachs estimates that as much as $4.7 trillion in revenue for traditional financial services offerings is at risk as a result of the new breed of Fintech startups.
The BBC notes the encroachment of these players on traditional banks is only set to increase in the coming years, particularly as new regulations favor startups. In the EU, for instance, the implementation of the Payment Services Directive 2 rules in 2018 will likely lead to more competition by forcing banks to open up their IT systems to new entrants.
Therefore, banks that do not respond to this changing environment can expect to be left behind. For instance, any financial institution that does not offer a mobile banking service will be marginalised.
An opportunity for collaboration
However, not all legacy banks are viewing Fintech startups as a threat to their established revenue streams – some are actively seeking to partner with these players in the hopes of improving their own innovations and working together to deliver services that customers really want.
Research by Efma notes that in 2015, 43 per cent of banks were positive or very positive about working with startups as business partners, and the effect such collaborations has can be significant. Over two-thirds of banks stated this has a high impact on their ability to deliver more innovative solutions, while more than half agree it has a high impact on the speed to market of their innovations.
Other institutions are looking to invest directly in Fintech startups in order to add their innovations to their own portfolios. For instance, Efma notes that Spanish bank BBVA has acquired user experience and design company Spring Studio to improve its offerings.
BBVA said: “The importance of user experience and design is growing exponentially in banking and with Spring Studio we can move into fast-forward mode with our design ambitions.”
An effective approach?
However, in order for such collaborations or investments to be successful, banks will need to have a clear strategy about how they plan to incorporate the technology and solutions they gain access to.
Frost and Sullivan analyst Gareth Mellon told the BBC that many of these efforts are purely “defensive strategies” that have proven difficult to integrate with existing business models. As a result, there is still uncertainty about how effective such partnerships will be – and in many cases, new startups will need the help of legacy banks.
“While Fintechs have brought heightened innovation, they remain limited in their scope and, in many ways, are forced to rely upon the established players to ensure market adoption,” he said.