Banks have always been portals performing a variety of jobs that all revolve around money. Whether that is managing, tracking, exchanging or spending your money, banks have always been a consolidated resource for performing a number of functions. When you look at the raft of fintech companies, it becomes clear that there are better ways to do some of those jobs. Banking services are being cherry-picked, one by one, to be digitised, refined and improved.
At the same time, consumers are demanding user-friendly, flexible and personal solutions for their money management, but surely won’t stand for traversing dozens of different apps to get it. The question, then, is what will follow the fragmentation and digitisation of the banking industry? Once the expansion of the fintech universe slows, what giant masses will form in its wake?
Meanwhile, traditional banks are beginning to respond in earnest to the threat of their younger and more technologically agile rivals. Take B, for example, the new offspring of Clydesdale Bank and Yorkshire Bank. Instead of trying to fundamentally alter the DNA of their existing organisations, Clydesdale and Yorkshire have opted instead to create their own challenger bank. It’s unclear just how independently B operates from its parents, but it’s built a brand that’s designed to offer the best of both worlds: a pretty face, and an experienced back-end.
But it’s not quite as simple as that.
Max Kalis, now an independent consultant, spent two and a half years building a culture of innovation for Lloyds Banking Group in an effort to support the bank’s ability to evolve for changing customer needs. According to Kalis, the success of hybrids like B will depend on how integrated they remain to their parent institutions, and how willing they are to explore collaboration with their disruptive competitors.
“Low levels of integration between the new bank and its parent mean the hybrid is free to be a truly different proposition. That said, in isolation the hybrid becomes just a faster horse, albeit one that can help drag the parent forward.”
There is a sense amongst fintech entrepreneurs that hybrid banks, whilst a predictable development in the race to own the future of banking, will struggle to pose serious competition to emerging challenger banks built from scratch.
“Bolting a new bank on top of the old does not deliver the cost economics or the transformative technology experience that many customers now want,”
says Anne Boden, CEO of Starling Bank,
“we will likely see more of such initiatives, but whether they are successful remains in question.”
What’s clear is that the core business model around banking will have to change if incumbents are to take advantage of the efficiencies of digitisation. That will mean leaner models powered by less manual processing, a mobile- first approach and on- demand customer service to name a few of the expected shifts in service.
But do these hybrids have the motivation to offer the lowest rates of cross-border peer-to-peer transfers, like TransferWise? It doesn’t make sense for a single bank to try and out-perform every competitor in every aspect of banking, simply because conflicting micro-economic forces make it impossible. Profitably competing with TransferWise on one hand will mean rendering the lending business uncompetitive to cover costs. Even incumbent spin-ofs like B, whilst friendlier and more user-centric, don’t give the parent banks the strategic imperative to minimise cost and maximise choice for the end user.
Will fintech and traditional banks someday find holy matrimony?
Some, including Jamie Campbell, Head of Customer Experience at Bud, believe the spirit of collaboration will prevail. Bud’s platform allows users to manage all of their financial services, spread between multiple companies, in one place; a bank with a small ‘b’.
“We believe the relationship [between banks and fintech] will be one of collaboration,”
“Each party has what the other needs: startups have agility and a technology- first mindset, whilst incumbents have consumer trust and the customer base. But there will be healthy competition. Neo-banks bring something new to traditional banking that will appeal to a lot of digital natives. The net result is that customers will have more choice, freedom and confidence in using a portfolio of services to take advantage of the new financial landscape.”
If indeed fintech startups and incumbents continue to operate under a policy of collaboration, a big question is how this will alter the competitive landscape.
For Starling and Anne Boden, the corporate giants are still wielding significant influence behind the curtain of London’s fintech scene. HSBC, Lloyds, and Barclays, as well as foreign banking groups like BBVA and Sabadell, now control new fintech firms with hundreds of millions in behind-the-scenes investment, dominating 1 in 4 deals. Boden suggests that rather than increasing competition, the fintech industry so far has been helping the banks fend o competition.
“Whilst fintech is no doubt creating a new understanding of what it means to provide a financial service, what is increasingly apparent is that fintech is less competitive than imagined due to the fact that many startups are collaborating with incumbents, becoming subsumed into old systems, competition may therefore struggle – or indeed become merely superficial.”
Boden is not alone when she calls for truly disruptive fintech to maintain a relentless focus on improving the end-user experience. But even a dozen beautifully designed apps are still a dozen apps, leading to the conclusion that before we see the bank of the future, we’ll first see a consolidation of scattered fintech into a single digitised portal… of sorts.
Charlie Taylor, Lead Analytics at Curve, believes that they’re ahead of, well, the curve, in this regard. Curve enable users to manage all of their bank cards in one place, using their Curve card and accompanying app. The company follows the premise that end-users want choice, exibility and control over how they manage and use their money, but not across multiple separate apps.
“We want to take advantage of better ways to transfer money, and easier ways to get access to new forms of money like loyalty schemes,” says Taylor. “I don’t want to walk around with a dozen loyalty cards in my pocket, I want it all digitised. But I also don’t want to have multiple different sign ups for different services, and I don’t want to have to manually connect all my accounts to the tools I’m going to need. I want a central platform, where I can plug together all the different service providers and tools that I want to use.”
So what of challenger banks, the Monzos, Starlings and Atoms of this world, are they the answer?
“The emergence of challenger banks will continue to drive the pace of change and increase the urgency for traditional bank reform,” says Taylor. “I suspect that some of the challengers will do well, and will be swallowed up by acquisitions. When looking at their strategic options, incumbent banks have three clear options: stay the same, try to do it themselves through skunkworks projects, or wait to see which challengers survive and buy them out.”
Let’s not get carried away on the revolutionary fintech bandwagon just yet. Upon further inspection, it would appear that the dethroned are bankrolling their own deposition. If fintech entrepreneurs are anticipating that the most successful challenger banks will be the first to be acquired by an incumbent, then is this burgeoning industry really as revolutionary as it would like to be? More to the point, is it hardly that surprising traditional banks won’t simply bleed to death at the hands of siphoning fintech startups? Banks will try to survive at all cost, though the cost will be spectacular. They were too big to fail 2008. What’s changed?
It all depends on just how far fintech entrepreneurs and their leadership teams are willing to go.
Make no mistake there are revolutionaries in our midst, on a mission to transform our financial landscape for good. “Finance has lost touch with real people,” says Starling’s Anne Boden. “Fintech was meant to solve this problem. However, technology for the sake of technology helps no one. Technology needs to fit the lives of people, not vice versa. Yet with such a tiny percentage of investment actually helping people to manage their money better, it becomes apparent fintech has lost sight of its own goals. The time has come to change the course of the financial revolution.”
By Will Reynolds, Managing Editor of the Fintech Times