Every day fintech entrants in the financial industry are growing in numbers with more than 12,000 entities having received $12 billion in investment funding in 2014, compared to $4 billion a year earlier. As a result, fintech start-ups are bringing noticeable competition to the financial industry’s traditional retail and investment banking organizations. What differentiates them from traditional banks and credit unions is their agility in addressing specific pain points such as payments, loans, mortgages, personal finance and remittance at speeds and pricing that is difficult for traditional banks to match. Like Uber for taxis, Netflix for video on demand and Airbnb for hotels, fintech firms are delivering convenience, simplicity and more affordable rates to the market through their innovative, technology-driven approach.

The most savvy traditional banks and credit unions see opportunities resulting from these new market entrants and are already embracing the trend with in-house start-ups or mobile-first banking apps. However, most are hesitating—or having difficulty—crossing the new technology adoption chasm.

One major reason traditional banks and credit unions are challenged by fintech is due to their large, departmentalized organization structure, which inhibits a quick response to customers and market changes. For example, a mortgage application may take several weeks to be processed by all the relevant stakeholders in a traditional banking organization, including the mortgage, legal, risk and compliance departments. In contrast, start-ups like Rocket Mortgage allow customers to move from application to approval in minutes.

The other major hurdle has to do with technology. Traditional banks and CUs have a large number of legacy systems in place and busy IT teams. They often have hundreds of siloed and often redundant systems that have accumulated over decades. IT teams spend a lot of time on maintenance of business critical systems that are using technologies that are no longer supported.

There are five things retail and investment banks and CUs can do to overcome these hurdles and fight the fintech battle. Let’s take a look at each of them.

  1. Leverage historical strengths to manage the customer’s moments of truth.

Traditional banks and CUs have a long history with customers and despite the financial crisis, they remain the primary institution managing savings. The close proximity of branch locations and easy access through call centers continue to make banks and credit unions the partner of choice for customers making important decisions such as buying a house, a new car, borrowing for small business and similar critical financial needs. Customers may like online access for convenience, but approximately 80 percent still prefer to engage with a “flesh and bones” bank representative at the moment of truth for an important purchase decision.

Providing best in class customer experience at these moments of truth can be a huge differentiator. Branch representatives have an unrivaled opportunity to act as trusted advisors who can help customize offerings to meet the unique needs of customers considering a transaction and guide them through the process, rather than simply providing a brochure showing the standard options and opening the account once the customer has made a decision.

  1. Create small, dedicated and “self-contained” teams charged with digital transformation.

Key ingredients for a successful fintech start-up are agility, speed of execution, the right to fail and motivation to change the status quo. Traditional banks and CUs, with the organizational and technological barriers they face, cannot hope to move as a whole company with the speed and agility of fintech.

However, large banking organizations can drive successful digital transformation projects with small teams shielded from the rest of the organization and charged with the sole objective of making change happen. Success for these teams will require strong support from organizational leadership and the ability to embrace the challenge. Success will also require leveraging what the bank or CU does best and not trying to completely reinvent the wheel for each of the solutions they implement.

  1. Let mobile lead the way.

The launch of the iPhone in 2007 ushered in a disruptive transformation that not only changed the landscape for phone manufactures and telecom but also across industries due to the exploding trend of smartphone usage. Smartphones are now in the hands of more than 80% of the population and banks and CUs are recognizing that mobile is now the prime channel to interact with customers. According to a 2015 Bank of America Trends in Consumer Mobility Report, 51 percent of respondents said they use mobile or online as their primary method of banking and 57 percent have tried mobile banking apps. Only 23 percent reported completing a majority of their banking transactions at a branch.

Banks and CUs need to think about what kind of mobile solutions they want to use depending on their goals. While native mobile applications are very effective for maintaining strong lines of communication with existing customers, they are less so when engaging with prospects that have not yet been vetted. Responsive web applications are a better choice for prospects. There are fewer barriers for adoption when browsing mobile websites as prospects consume content in an instant with no download or registration. As a result, bank and CU marketing departments will benefit by using mobile websites to better engage with prospects and convert them into clients.

Another trend concerns field agent mobility and mobile solutions to support them. As customers seek out convenience and simplicity, some banks and CUs are developing tablet applications for their field agents. These mobile apps help them to operate from client sites whether online or offline and without needing to process paper-based documents.

  1. Adopt cloud solutions for agility.

Cloud solutions are growing fast in a financial industry that has long resisted change. Requests for Information (RFI) or Requests for Proposal (RFP) are now bringing the topic to the table. Often driven by the lines of business or marketing departments, forward thinking financial institutions understand the advantages cloud-based approaches can bring. They see cloud-based solutions as a way to:

 

  • benefit from business capabilities in an instant, not months
  • scale business operations at a moment’s notice
  • relieve their IT team from maintaining yet another system
  • benefit from other solutions available in the same ecosystem

 

However, enterprise class cloud-based solutions do not come without costs. In order to make them effective they often need to be integrated with core backend systems. This is often expensive to do but there are ways to fast track integration leveraging legacy outputs.

 

Resistance around data ownership is another big topic. Because financial institutions manage highly sensitive data, the organization’s compliance, legal and risk departments are often reluctant to move into the public or even a private cloud. Nonetheless, there is a growing trend in the willingness of banks and credit unions to adopt cloud-based solutions to design customer interfaces, business rules or documents while keeping sensitive customer data on their own servers. This hybrid cloud approach allows customers access to their data from the bank’s or CU’s servers but also enables business users to benefit from the latest solution capabilities.

  1. Incubate, invest or adopt in the fintech space.

As the financial industry consolidates, talented individuals will take on new ventures to capitalize on disruptive new ideas that change the status quo. As mentioned above, already 12,000 start-ups have received $12.2 billion of capital investment. Like the “gold rush,” fintech firms have almost become an industry in their own right. However, securing bank and CU investment in the fintech space seems to be harder than first thought.

(Chart: Reactions of global banks to the development of fintech companies as of February 2015, source Statista)

 On the one hand, fintech firms want to keep a certain level of freedom to remain agile and attractive

for future investors. For most fintech owners, the goal is to cash in when they sell their business. Having a bank as an investor may significantly reduce the attractiveness and potential to reach that goal for some fintech firms, because a bank doesn’t want to buy a fintech that would make a competitor that has an ownership stake in it richer. Fintechs are instead looking for investors who will not jeopardize the start-up’s potential value. Additionally, bank or CU staff may view fintechs as a direct threat to their jobs. They may become unwilling to adopt these new services that could make their work redundant.  Change management may take months, if not years, to implement.

Leadership from the top is essential for success.

Successful banks and credit unions have board members setting a clear vision, transparently explaining the reasons for their choices and motivations. They can make the case for why their enterprise needs to incubate, invest in or acquire fintech firms. They must play bold and fair with both fintech owners and their own staff— this way they leverage and manage their risks while embracing a whole new technological revolution about to hit the banking industry harder than any before.

 

Antoine Hemon-Laurens is Banking Customer Communications Management Expert at GMC Software Technology. His focus is on helping banks better engage with their customers through mobile solutions, customer engagement and digital signatures. Contact him at  a.laurens@gmc.net or on Twitter @anthemlau.

Written by Antoine Hemon-Laurens