As a rule, businesses and consumers want their banks to be safe, solid and conservative, but they also want them to move with the times – it’s something of a paradox. From the banks’ perspective, there’s a logic behind this apparent contradiction. If an established bank doesn’t move quickly enough, it leaves gaps in the market for new brands to emerge with a new approach to services. We saw this happen in retail banking in the 1990s with the emergence of First Direct, Virgin Money and Tesco Bank in the UK, while in a post-deregulation US, a swathe of mergers and acquisitions led to the rise of new banks and brands, albeit ultimately controlled by traditional financial institutions.
Today, technology disruption is now birthing well-funded challengers across retail and commercial banking, with no branch overheads, offering flexible and transparent services. These newcomers to the market can offer better rates, lower costs, increased transparency and data analytics. Crucially, they have a lack of legacy, both in terms of customers but also technology and property.
So how do established banks compete? In truth, they have a difficult choice to make: Do they try to beat the challengers at the fintech game by building something new, or do they match them tech-for-tech, service-for-service through fintech partnerships and outsourcing?
Rolling out an approach
In my view, the latter approach has much to recommend it across the retail and commercial banking sectors. Retail banks are leading the way, of course. They increasingly see fintech partnerships as a fast track to digital, and in many cases cultural, transformation. Forming alliances with fintechs is a great way to quickly and efficiently introduce attractive and lucrative mobile services. They want to woo the millennials away from other nontraditional forms of banking, and the partnership approach is a great way of doing this.
But commercial banks also need to attract the millennials. They increasingly recognise that this demographic will form the corporate boards and senior bank employees of the future. They also see fintech partnerships as a great way of tapping into the compelling, new technology functionality of the future.
One such technology that commercial banks increasingly see as a must-have is data analytics. In line with this, one of the major sources of data that can fuel this capability is provided by commercial card programmes. Offering commercial cards is a valuable service; it means a larger share of expenditure flowing through the service rather than via invoicing, and increased values as a result.
The opportunity to leverage the skills and technological capabilities that fintechs bring to the table allows commercial banks in this context to take a more granular approach to collecting and analysing data, in turn providing a valuable, detailed portrait of each individual client. Adopting tracking parameters such as spend per account (SPA) and average transaction value (ATV) identifies opportunities to maximise investment, and enable a greater ability to combat high delinquency rates and other underlying issues.
Working with fintech means all of this and more is possible. Partnerships are a way to accelerate the development and introduction of services. They enable a commercial bank to sidestep any agility issues with legacy systems while reducing their internal development costs.
At a broader level, partnering with fintech providers allows commercial banks to tap into the rewards of successful innovation without taking the risky and time-consuming step of going it alone. Working with a fintech means access to the latest technologies and thinking. It’s less of a leap and more of a step in the right direction. It helps these banks test the water without plunging in out of their depth. Moreover, it turns what might be a potentially disruptive approach into one that’s more about convergence.
Some commercial banks historically have been fearful of fintechs, seeing them as disruptive influences focused on trying to “kick the bank out of the relationship”, and replacing their payments capabilities with their own. This viewpoint is increasingly outmoded, where there’s a growing consensus that smart technology companies and banks should instead be forming more mutually beneficial relationships. Banks can focus on controlling the overall narrative (and the commercial relationship), while the fintech concentrates on software development, maintaining the product and delivering the best possible customer experience from a technology perspective.
The rapid rise of fintech provides opportunities for commercial banks to fulfil market needs and plug gaps in their service offerings. It’s about identifying key, digital-driven services that will help retain customers and encourage new ones to join, not give customers a reason to abandon ship. For example, the ability to offer card expenditure and balance transparency could improve card delinquency rates, therefore reduce risk and costs for issuing banks. It’s a simple, yet powerful service that can be tagged on to an existing business with minimum overhead.
This is far from the only benefit of partnering, though. The enhanced agility the approach brings also helps banks accelerate service offerings and improve customer satisfaction. This way, they can get around the agility problems caused by legacy systems and avoid the huge outlay of a major implementation. Partnership is also a way of future-proofing operations. Banks buy into a product roadmap that will keep their technology – plus their products and customer service – ever relevant.
As we look to the future, the partnering approach is becoming more attractive to commercial banks. They understand the need to embrace innovation and keep ahead of the technology curve, but it’s not their core focus or forte. They know their customers value their reliability, trustworthiness and the strength of their brand and they need to preserve this positive relationship.
In today’s fast-moving banking landscape, however, they can’t afford to remain passive. Success in banking tech is about seeking out a successful route into the future, and partnering with high-quality fintech providers offers them a clear roadmap for the way ahead.
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