Digital newcomers push traditional banks to improve

Startup financial technology (FinTech) companies may be the best thing to happen to traditional banks in a long time. No, really.

Many have warned that the introduction of digitally savvy options into a traditional market can be disastrous. After all, just look at what Uber is doing to the taxi business. In a heavyweight match between traditional banks and digital innovation, no one would bet on the traditional banks. These two kinds of financial organizations, however, are in less of an all-out fight and in more of a breakneck race toward the future. And this is a race that traditional banks may just be able to win.

Digital options like GoBank, PayPal and Venmo began the race with a distinct competitive advantage. They were built specifically for the purpose of online and mobile service delivery, making them more adaptable as technology and trends change. Many banks, on the other hand, are saddled with figuring out how to integrate their brick-and-mortar operations into online and mobile platforms.

The flexibility of challenger banks and FinTechs also appeals to the up-and-coming millennials market. A 2014 study by Viacom Media found that 73% of the more than 10,000 millennial respondents said they were more excited by new financial services offered through Google, Amazon, Apple, PayPal, or Square than via their own banks. This makes sense. After all, why would you go through the laborious process of opening a new account or sifting through various services at a traditional bank when you could sign up for a clean, easy service with a digital giant like Google? By the time traditional banks catch up with the innovations of their digital counterparts, customers will have already moved on to the next new trend.

Innovation Goldmine
So, how could this possibly benefit traditional banks? Think about the progress Apple has made in computers. In the 1990s, the idea that Apple could outpace Microsoft was laughable. Yet it was this goal, out-innovating Microsoft, that drove Apple to create products like the iPod and iPhone, which revolutionized and drove innovation in the market. The race between challenger and traditional banks presents a similar innovation goldmine.

Traditional banks may be slower and more ponderous when trying to change, but the momentum they have on their side includes stronger security systems, a pre-existing customer base, established delivery channels and financial expertise. They also have experience navigating many of the financial regulations that their challengers have yet to experience. These advantages create a stronger base from which to innovate. While the challenger banks are fast to innovate, they also face a larger risk of stumbling and falling by the wayside.

Traditional banks also offer one service many digital challengers do not that is surprisingly appealing to millennials: real, live people. One recent study revealed that millennials overwhelmingly choose face-to-face meetings as the best way to communicate with their colleagues, despite the popular stereotype that millennials are glued to their phones 24/7. More than 80% said that communicating through face-to-face meetings is critically important to maintaining relationships at work, which bodes well for traditional banks that, seek to form lasting relationships with customers.

On top of that, it turns out that younger consumers continue to appreciate the brick-and-mortar aspect of traditional banks just as much as anyone else. According to the J.D. Power 2015 U.S. Retail Banking Satisfaction Study, millennial customers are going to the physical branches of their banks just as often as their parents do.

In the race between traditional and innovative, challenger banks and FinTechs have a lot of work to do as well. They must continue to innovate just as or more often than their traditional competitors, while also building up security and determining how and whether to offer a channel for human interaction. They must also be prepared to face higher levels of regulatory oversight, as the law catches up with the digital economy. Traditional banks have a more solid foundation in these areas, in theory, giving them more room to focus on digital innovation. Of course, this is easier said than done, as it requires traditional banks to build innovation into the very core of their business, rather than tacking it on as a mobile app afterthought.

Take, for example, Hampden & Co in the UK, which launched Hampden Bank, the first new private bank to emerge in that country in 30 years. By offering better and faster digital services, Hampden is attempting to compete in the private banking sector against new emerging FinTechs such as Nutmeg, which offers lower-cost online wealth management. National Australia Bank, meanwhile, has been undergoing a large core transformation project since 2007 that will enable it to deliver more user-friendly capabilities in record time, including a new credit card in seven minutes and personal loans funded on the same day vs. twelve days. It’s about future-proofing your business by branching out with new digital developments and innovations.

In order to stay in the race, traditional banks must be the first to move on a new digital development, rather than just quickly following the developments of others. Fortunately, all of the banks’ work to outpace each other ultimately benefits consumers. Both traditional and challenger banks are racing toward the same finish line: creating safe, compliant, convenient and digitally accessible financial services and products of the future.

Mr. Singh is senior vice president and general manager with Oracle Financial Services, a unit of Redwood City, Calif.-based Oracle. He can be reached at @SonnyHSingh on Twitter.