Do you recall the phrase Digital Divide? It refers to the ease of access to the Internet between different socioeconomic groups that could result in a disadvantage for future opportunities. I’m sensing a similar divergence today in banking between organizations who believe they can sit on the sidelines and watch the action and those who are actively addressing their strategic options with their own response to digital transformation. This market shows little to no mercy to banks slow to embrace the change.
Admittedly, this is an imperfect analogy. It may seem a little extreme and simplistic given that banks generally have the financial resources to invest in the digital infrastructure for tomorrow. The challenge here, instead of financial resources, becomes the mindset of bankers and their boards who believe that traditional relationship banking must be face-to-face to be effective. While I would never question the value of trust building via interpersonal connections, the attitudes of younger generations compared to an aging demographic of existing customers are changing rapidly. Which makes me wonder – have we reached a tipping point?
At the heart of this divide are the disruptors that are beginning to gain traction and chip away at the veneer of the traditional banking model. I’m talking mainly about fintechs – organizations that have identified a specific segment or niche and have built a digital platform to execute on a simple value proposition, using technology to create a customer experience through online or mobile web applications.
Why have they been mostly successful thus far and why should bankers be concerned or involved?
In a nutshell, many of the fintechs have started with an idea to solve a specific problem and have been able to raise sufficient funds to develop their applications. Valuations in the capital markets have favored them because of the efficiency of their software and the large addressable market in a digital environment. Compared to a traditional bank, they are not bound by regulatory restrictions, core banking provider limitations and typical development timetables. Their agile software development practices allow them to respond quickly to produce great customer experiences that generate expectations for future interaction.
Yet, they aren’t completely dominating the market with this advantage – why?
The answer, from my perspective, goes to execution and ultimately trust. Most fintechs either focus on asset generation, such as lending, or deposit/payments access. Current banking law requires a state or federal banking charter if you make loans and take deposits. Because of the regulatory requirements, fintechs must find a banking partner/sponsor to offer a complete range of financial services, while maintaining full control of the customer experience. The fastest way to do this is through Banking as a Service (BaaS), where the fintech contracts with a bank to utilize their core processing platform and shares the transaction and customer data via Application Programming Interfaces (API’s). This is where the plumbing gets interesting.
API’s are not necessarily standardized and every core provider has different requirements. Furthermore, there are neobanks running on next gen core software that are cloud-native, digital centric systems that can seriously reduce the time and cost of development. Some of the next gen cores are still building out their full capabilities toward a true Open Banking environment where integration issues will be much improved over the current banking ecosystems of today. In fact, they’re designed to utilize the best of breed components that will be seamlessly embedded within an app to provide any financial transaction service needed.
Today, most institutions are bound within the confines of their existing core contract providers who are feverishly acquiring fintechs with outstanding features and functionality. The problem with this for banks, however, is that it typically takes years before those features and functionality are integrated into the core platform. In the meantime, the aggressive fintechs will continue to win the hearts and wallets of your younger customers and prospects, leaving you at the mercy of the major core providers and their development rollout timetable. Before you eagerly sign up for their next bundled solution, it may be time to consider unbundling their offerings and pass on the discounts dangled in front of you to sign up.
So, which camp is your bank in today? Are you content to wait for your core provider to respond to the fintech challenge or will you identify your bank’s vulnerabilities and determine how best to approach the alternatives in the market today? Do you trust your core provider to deliver a unique solution, or will your bank be just the same as others in your market, with a pretty brand wrapper and no distinguishing features? It’s time to start thinking about the risks associated of not planning your future strategic direction in this digital world we live in. Every bank will need to consider the alternatives and their strategic direction before making these very important decisions. Artisan Advisors is ready to guide you through this daunting but exciting new territory.