MarketWatch
How big banks can stop FinTech upstarts from getting your money
A high-stakes competition is underway between traditional financial services institutions and disruptive FinTech startups.
The Economistreports that more than $25 billion has been invested in financial technology — FinTech — in the last five years, with 4,000 firms challenging banks in just about every product line. As financial services comprise about $1.2 trillion of U.S. GDP, increased levels of investment are likely.
Big banks have the advantage in this fight — at the moment. These institutions have well-earned reputations for safety and security. They benefit from strong, multi-generational customer relationships, have considerable brand equity, and offer myriad financial products and services.
Except well-funded, agile FinTech startups including SoFi, Billguard, Square, Wealthfront, Venmo and Neighborly are innovating and nibbling away at banks’ market share. They’re doing this by offering custom solutions for everything from student-loan refinancing and payment processing to lending and facilitating neighborhood investment.
Those betting that banks will go the way of the mainframe computer are likely to be disappointed.
Still, those betting that banks will go the way of the mainframe computer are likely to be disappointed. If banks address the threats by embracing and investing in the technologies that are enabling the FinTech disruptors to level the playing field, they will continue to thrive.
The good news is that banks have the capital to invest in technology and to innovate through software, particularly open-source software, which is powering the solutions of game-changing companies worldwide. Forward-looking financial institutions are already upping their tech game. Improving user experience, providing more insightful data analysis, and increasing cybersecurity are key areas where traditional banking and FinTech compete. Technology — specifically software — will have a big impact.
Lou Shipley, Lecturer at the MIT Sloan School of Management, says that there are many firms competing with banks in FinTech - they're laser-focused, nimble startups taking advantage of the newest forms of technology. In order to compete with the big banks, they're going to need to grow fast like Uber did, says Shipley.
According to a December 2015 research study by the experience-design firm, Beyond, 53% of customers want faster ways to conduct banking transactions online and 50% want easier ways to log into their account. In today’s time-crunched, mobile world, banks must put a higher priority on establishing leadership in both transaction speed and ease.
There’s good news for banks in the Beyond report: When asked what mattered most to them when dealing with their bank, customers’ top answer (48%) was the quality of the branch experience. High-touch still matters.
Ironically, one of banking’s biggest customer-experience assets — being the one-stop shop for a broad range of financial products and services — is also among its biggest competitive weaknesses.
Many traditional banks are organized into silos, with solo business lines for individual products and services that use separate information systems and do not communicate well with each other. To improve customer experience, banks must be able to dynamically analyze customer information and make it useful for them and for customers.
This is clearly an area where technology can help. Like their upstart FinTech competitors, banks need to harness the power of open-source software and build digital platforms that will enable them to provide new and improved services demanded by customers.
Security is another major factor in battle — both the perception of security as well as the actual ability to keep financial information secure. Larger financial institutions currently excel at both. Big banks know they are targets for hackers and they are wisely spending a lot of money on great security systems to ensure safety for consumers. Startups would do well to pay attention to Beyond’s finding that 71% of customers want increased levels of security in the digital banking experience.
Rounding out big banks’ strengths is compliance. Large financial institutions have a long history of working with auditors and regulators and this gives them a significant advantage.
The Uber phenomenon is a good example. When the ride-sharing service launched, taxi companies were not prepared and Uber was able to grab market share. Now, regulators in many countries are asking questions. Like Uber, the explosion of FinTech startups has created a Wild West environment. At some point, regulators are likely to get involved, offering traditional banks another chance to distinguish themselves.
Smart FinTech firms will anticipate this, and I expect we will see acquisition or partnership announcements between large institutions and startups.
While banks may be worried about their ability to hold onto customers, upstarts are even more worried about attracting and retaining customers. This will be a fascinating battle, but banks are well-positioned to win if they continue to invest in, and strategically use, technology.