Financial technology (FinTech) start-ups are bringing noticeable competition to the financial industry’s traditional retail and investment banks. What differentiates them from traditional banks is their agility in addressing specific pain points such as payments, loans, mortgages, personal finance and remittance at speeds and pricing that is difficult for traditional banks to match. Like Uber for taxis, Netflix for video on demand and Airbnb for hotels, FinTech firms are delivering convenience, simplicity and more affordable rates to the market through their innovative, technology-driven approach.
One major reason traditional banks are challenged by FinTech is due to their large, departmentalized organization structure, which inhibits a quick response to customers and market changes. For example, a mortgage application may take several weeks to be processed by all the relevant stakeholders in a traditional banking organization, including the mortgage, legal, risk, and compliance departments. In contrast, start-ups like Rocket Mortgage enable customers to move from application to approval in minutes.
The other major hurdle has to do with technology. Traditional banks have a large number of legacy systems in place, with often hundreds of siloed and often redundant systems that have accumulated over decades. IT teams spend a lot of time on maintenance of business critical systems that are using technologies that are no longer supported.
Here are five strategies for overcoming these hurdles and fighting the FinTech battle:
Leverage historical strengths for the customer. The close proximity of branch locations and access through call centers continue to make banks the partner of choice for customers making important decisions such as buying a house, a new car, borrowing for small business and similar critical financial needs. Customers may like online access for convenience, but approximately 80% still prefer to engage with a “flesh and bones” bank representative at the moment of truth for an important purchase decision.
Providing best-in-class customer experience at these moments of truth can be a huge differentiator. Branch representatives have an unrivaled opportunity to act as trusted advisors who can help customize offerings to meet the unique needs of customers considering a transaction and guide them through the process, rather than simply providing a brochure showing the standard options and opening the account once the customer has made a decision.
Create small, dedicated teams charged with digital transformation. Key ingredients for a successful FinTech start-up are agility, speed of execution, the right to fail and motivation to change the status quo. Traditional banks, with the organizational and technological barriers they face, cannot hope to move as a whole company with the speed and agility of a FinTech.
However, large banks can drive successful digital transformation projects with small teams shielded from the rest of the organization and charged with the sole objective of making change happen. Success for these teams will require strong support from organizational leadership and the ability to embrace the challenge. Success will also require leveraging what the bank does best and not trying to completely reinvent the wheel for each of the solutions they implement.
Let mobile lead the way. U.S. smartphone adoption is up to 70% of the population and banks are recognizing that mobile is now the prime channel to interact with customers. According to a 2015 Bank of America Trends in Consumer Mobility report, 51% of survey respondents said they use mobile or online as their primary method of banking and 57% have tried mobile banking apps. Only 23% reported completing a majority of their banking transactions at a branch.
Banks need to think about what kind of mobile solutions they want to use depending on their goals. While native mobile applications are very effective for maintaining strong lines of communication with existing bank customers, while responsive web applications are a better choice for prospects. There are fewer barriers for adoption when browsing mobile websites as prospects can consume content in an instant with no download or registration required. As a result, bank marketing departments will benefit by using mobile-enabled websites to better engage with prospects and convert them into clients.
Another trend concerns field agent mobility and mobile solutions to support them. As customers seek out convenience and simplicity, some banks are developing tablet applications for their field agents. These mobile apps help them to operate from client sites whether online or offline and without needing to process paper-based documents.
Adopt cloud solutions for agility. Often driven by the lines of business or marketing departments, forward thinking financial institutions understand the advantages cloud-based approaches can bring. They see cloud-based solutions as a way to: benefit from business capabilities and scale operations quickly; relieve their IT team from maintaining yet another system; and benefit from other solutions available in the same ecosystem. However, enterprise class cloud-based solutions do not come without costs. In order to make them effective they often need to be integrated with core back end systems. This is often expensive to do but there are ways to fast track integration leveraging legacy outputs.
Resistance around data ownership is another obstacle. Because financial institutions manage highly sensitive data, the organization’s compliance, legal and risk departments are often reluctant to move into a public or even a private cloud. Nonetheless, there is a growing trend in the willingness of banks to adopt cloud-based solutions to design customer interfaces, business rules or documents while keeping sensitive customer data on their own servers. This hybrid-cloud approach allows customers access to their data from the bank’s servers but also enables business users to benefit from the latest solution capabilities.
Incubate, invest or adopt in the FinTech space. FinTech firms are growing rapidly, with 12,000 startups having attracted $12.2 billion of capital investment in 2014. Bringing technology organizations onboard is a great way to speed digital transformation and to align to customer expectations. However, securing bank investment in the FinTech space seems to be harder than first thought.
On one hand, technology firms want to keep a certain level of freedom to remain agile and attractive to future investors. For most FinTech owners, the goal is to cash in when they sell their business. Having a bank as a main investor may significantly reduce the attractiveness and potential to reach that goal for some FinTech firms, as banks may not want to buy a firm that would create additional capital for competitors with an ownership stake in that company. FinTechs are instead looking for investors who will not jeopardize the start-up’s potential value. Banks should consider co-investing through joint-ventures.
Leadership from the top is essential for success. Successful banks have board members and C-level executives setting a clear vision and transparently explaining the reasons for their choices and motivations to their managers and staff. They make the case for why their enterprise needs to incubate, invest in or acquire FinTech firms. They must play bold and fair with both FinTech owners and their own staff so that they can leverage and manage their risks while embracing a whole new technological revolution.
Mr. Hemon-Laurens is banking customer communications management expert at Appenzell, Switzerland-based GMC Software Technology. He can be reached at firstname.lastname@example.org.