By Matthias Weissl, CEO of Verum Capital and External Lecturer at the University of St Gallen MBA
People are exhausted by banks being slow in areas like settlement time, access to services and ultimately – adoption of change. Fintechs are attacking these vulnerabilities and customers are seeing value in the emerging products and services. What will it take for banks to survive?
Automation is the way forward for banks
Automation has benefits for both businesses and customers. For businesses, it reduces headcount-related costs without substituting an equal increase in software-related costs, while shortening time-consuming processes and minimising human error. For customers, it creates faster, simpler and often less expensive user experiences.
Increased regulatory scrutiny, legacy infrastructure and multi-year migration projects are just a few of the challenges that make banks slow to pursue automation. For example, in Switzerland, Credit Suisse is planning to migrate to new IT infrastructure in 4-7 years from now. This kind of timeline may present a challenge to remain competitive, as data volumes grow ever larger.
Internet data is almost doubling every year and is projected to exceed 400 exabytes per month by 2022. By that time, 44% of data will come from smartphones, compared to just 18% in 2017. Growth in mobile use will happen mainly due to technologies like 5G, which will increase the average internet speed on mobile devices from 8.7 Mbps to 28.5 Mbps, and improve the accuracy of tracking through reduced latency. The volume of data that will be generated, and the ease of use that mobile users will have become accustomed to, make the introduction of automated processes an imperative.
Internet data is almost doubling every year and is projected to exceed 400 exabytes per month by 2022.
In recent years, banks have been unable to benefit from automation as much as fintech companies have. The largest Swiss bank, UBS, needed 210 employees for every $100m (USD) earned in 2017. By comparison, China-based fintech Ant Financial needed 100 employees for every $100m earned in 2017, less than half the headcount. Opening an account with a traditional bank can take hours, even days or weeks. It takes a few minutes to open a bank account with Revolut or N26. Transactions at banks are also multi-day events and often ask users to confirm payment by generating a code through a hardware token, such as an external USB stick or card reader that you need to keep on hand. Transfers with Revolut or N26 can happen instantly and approval of all transactions happens entirely in the app.
At Verum Capital, a Switzerland-based blockchain firm I co-founded, we advise banks on how blockchain technology can be applied to improve services. In our experience, banks lack technical employees who understand, at an operational level, how to implement blockchain initiatives. Executives at banks increasingly hear that blockchain can help them reduce transaction fees, decrease settlement times or create liquidity for traditionally illiquid assets such as real estate. They often possess the strategic vision to integrate blockchain technology, but not the technical know-how. It is not simply a matter of firing and hiring. Globally, very few people understand what it actually takes to implement blockchain solutions. It is an emerging technology and competition for expert practitioners is fierce, especially in terms of company culture alignment.
At Verum Capital we have frequent requests from banks for educational workshops. From what we see, once the small banks gain more knowledge about blockchain, and if they can create a culture that attracts technical talent, they will likely be the first banks to implement automation through blockchain solutions. This is because in terms of their past software decisions, small banks have less technical debt than large banks. Small banks already express high interest levels to us regarding the tokenisation of physical assets and funds in order to increase their liquidity. This use case will become mainstream once regulated digital exchanges, like the forthcoming SIX Digital Exchange in Switzerland, allow the trading of tokenised assets.
Enter the challengers
Fintech companies are typically less funded than big banks. They need to do more with less. Which is why automation is often at the core of their offering. This puts fintechs in an advantageous position to navigate the data-rich future. However, fintechs cannot beat banks everywhere. Nor do they want to. Recent trends show that for fintechs it is a better strategy to occupy a niche. If fintech companies try to do too much, they risk spreading resources too thin and delivering an average customer experience rather than an exceptional one. Fintechs risk becoming more like the big slow banks they’re trying to challenge. The way they challenge banks is through specialisation and collaboration.
Small banks already express high interest levels to us regarding the tokenisation of physical assets and funds in order to increase their liquidity.
Let us return to Revolut and N26 to illustrate this point. Their respective core products are payment cards with low foreign exchange fees and fast transaction settlement times. This is a highly focused specialisation. To deliver this value they have partnered with several other companies. Collectively, the partners create the ecosystem necessary for Revolut and N26 to offer their core products. For example, Revolut uses ClauseMatch to deal with anti-money laundering processes, Onfido for remote customer identification, and White Horse for client insurance. A similar mix of companies enables N26 to focus in-house resources on its payment cards. This ecosystem of startups specialising and collaborating in the financial industry would not have been possible a few years ago due to regulatory restrictions. Recent regulatory changes have made it much easier for fintechs to emerge and the changes are happening globally.
A typical European case is that of Lithuania. Lithuania streamlined its application process for an electronic money license, enabling companies to secure one in three months. This is much faster than in other countries. Lithuanian e-money licenses allow companies to apply for passporting rights to offer services across the EU. Application volumes have risen sharply. In Hong Kong, new entrants to the financial market can now apply for a virtual bank license. With a virtual bank license, one niche that is expected to generate a healthy return on equity is the provision of small unsecured loans to retail customers via credit cards.
Big tech companies are also thinking about ways they can add value in the financial services industry, and they see value in collaborations too. Take the recent launch of the Apple card. Apple provides the interface solution to customers, while Goldman Sachs provides banking infrastructure and required licenses as the issuing bank.
Banks have a complicated relationship with technology
Goldman Sachs is very visible in its collaboration with Apple, in part because it has never before issued a credit card and has essentially no history with consumer banking. In other collaborations, banks are more in the background, in some cases providing services anonymously to customer-facing fintech companies. Take US-based fintech LendingClub for example. To facilitate peer-to-peer lending they require an issuing bank, and therefore established working relationships with WebBank, NBT Bank and Comenity Capital Bank. LendingClub owns the technology and runs the marketplace and the banks effectively rent out their regulatory status for a fee.
Goldman Sachs is very visible in its collaboration with Apple, in part because it has never before issued a credit card and has essentially no history with consumer banking.
The relationship between banks and financial technology companies goes even deeper though. While banks discretely enable customer-facing fintechs to operate, other technology companies sit even further in the background, providing critical products that enable banks to run. This is especially the case at smaller banks. Companies like Fiserv, FIS and Jack Henry & Associates Inc. are little known outside the banking world. Nevertheless, their technologies make up much of the modern banking system. From software for debt collection to core system design, they provide a huge range of products that enable banks to run. Executives from small banks say they feel as if they are becoming franchises of these providers, because they are so reliant on their technology.
All roads lead back to education
In general, business students learn to conceptualise about technology, and leave technical execution to people with computer science, data science and cryptography educations. There is a growing need in the financial services industry for people who can think strategically and then implement technology themselves. In parallel, there is a growing need for banks to develop environments where technology workers can thrive, in terms of both the IT infrastructure and the prevailing employee culture. Changes in business education can help by graduating more tech-savvy finance professionals into the workforce.
There is a growing need in the financial services industry for people who can think strategically and then implement technology themselves.
In Switzerland, the University of St.Gallen MBA launched an elective this year called ‘Fintech: Trends and Use Cases’, which we at Verum Capital teach. Additionally, the MBA programme launched a fintech case competition this year in collaboration with SIX and digitalswitzerland on how to scale regulated digital exchanges internationally. Further, the Berlin School of Sustainable Futures, University of Applied Sciences (BSSF) uses blockchain technology for course administration, curriculum selection and fractional ownership by students. They are also part of our network at Verum Capital. The University of St.Gallen MBA and BSSF examples show that fintech has begun to converge with mainstream business education in the best interest of the industry.
The banks that thrive in the future will be those that learn how to collaborate with fintechs and augment their company cultures to become technology leaders themselves. If they don’t, members of the increasingly tech-savvy financial services workforce will desire to work elsewhere or increase competition by starting their own companies.