Technology serves to shake-up the finance industry as we know it. Through the introduction of new innovations and challenger business models, the banking industry has been just one of a long list of industries that have been shaken up as a result.
In the past, the introduction of Fintech has been considered revolutionary, evolutionary and, in our opinion: both.
Considering the kind of challenges mainstream companies have to deal with, and the opportunities that are presenting themselves.
The User Comes First
For those residing in the developed markets of USA and Europe, we often take having a bank account for granted. But even with this affluent accessibility, user expectations dominate the way that banks operate.
Having a banking solution that keeps up with the pace of its average user, for example, is one of the reasons why challengers are so popular amongst younger generations. The fundamental reason? Adaptability.
In a study by Kearney in 2018, the majority of 16-38-year-olds prefer their bank for the flexibility that it offers, including account compatibility and general ease of use in setting up payments.
The further down the age demographics you go, however, the harder it is for users to see any advantages to challengers at all. For these groups, and populations in the US and UK, as a whole.
In the UK, this adaptability is the key to unlocking user acquisition and retention for banks on both sides. Finder found that, within one year, the number of users of a digital bank grew by 14%, reaching 23%, with these qualities being key to this growth.
For example – Trust and a firm grip over aspects like mortgages, insurance and loans assure traditional banks a commanding position for the time being.
Trust, even when surveying challenger bank users, appears to be stacked for traditional banks. Specifically, when dealing with monthly salary, bills, and larger transactions: the majority of traditional and challenger bank users prefer to use the tried and tested.
Having decades worth of experience in managing these kinds of transactions would certainly earn traditional banks something akin to passive acceptance and trust from their users.
But going traditional comes with its fair share of challenges for their customers and when having to confront new challengers.
Going Traditional: the Challenges
Financial institutions have, for some time, struggled with keeping up to date core and legacy systems. According to a study by the Financial Conduct Authority (FCA), less than 50% of banks upgrading these promptly.
Looking over to the U.S., we see a pretty startling example of this – with 43% of banks still running using COBOL – which is a programming language first introduced in 1959.
While this seems innocuous, there are plenty of mainstream banks that are hamstrung by these same legacy systems, with attempts to expand upon them leading to system outages.
Along with incurring a substantial price-tag, replacing these legacy systems places a growing fiscal and regulatory challenge for more established names.
Banks in the U.S. spend anywhere from $2.7 billion (Bancorp U.S.) to $16 billion (Bank of America) to make these changes.
Banking institutions are more than aware of the challenges. During the Bank Governance Leadership Network in London on 27th February, the two big questions appeared to be:
- How can banks effectively address core system upgrades?
- What are the considerations for boards, management teams and supervisors as firms weigh their options?
The Challengers: Revolution or Evolution?
One of the catalysts behind these kinds of questions taking centre stage and the increased spending on IT originate from Fintech challengers.
In the U.K., there was an untapped market that major banks had yet to enter. Having to contend with the aftershock of the 2008/9 financial crisis, Fintech companies had wider remit to innovate and develop.
So what did these challengers have going for them that traditional players didn’t? For one, it was easier and cheaper for them to maintain a dynamic system for quick payments.
Challengers – Rapid, Dynamic Digital Payments
Fintech challengers could easily leverage cloud, mobile and even blockchain to maximize security and optimize logistics while bypassing the challenges that established names have to deal with.
The online payments market is a good example. Fintech companies were capable of offering users a more intuitive, highly accessible banking solution and payment method – something those larger counterparts couldn’t.
Looking further abroad to Latin America and Asia, for example, we see the distinct advantage of challengers when confronted with the circumstances of these regions.
It’s when we consider these factors that Fintech itself seems less like evolution or revolution, and more like an entirely different game. And its this ability to outperform by reinventing that gave it good odds at overtaking the incumbents.
Their mobile-accessibility offered users an easy way to make payments at a time when the global digital payments market was forecasted to reach $3.6 trillion and beyond, according to Juniper Research.
The introduction of these challengers placed additional pressure on the big names to adapt, or risk being outpaced by newcomers that weren’t as hemmed in by upgrade costs, or regulatory challenges.
Research from Deloitte back in 2016 lays out the future landscape for traditional banking and finance in concise detail – one more focused on simplification for the end-user, while using tech to streamline their businesses, as a whole.
Regardless of the influence that challenger banks had on institutional finance is hard to quantify, but the latter has worked to better meet the demands of its user-base somewhat.
Bank of America is one example, with its continued investment into the B2B payments solution – CashPro – and increased spending by the industry as a whole.
While there is far more spending dedicated to upgrading and keeping up with Fintech challengers, the landscape is more akin to an arms race than an Evolution/Revolution. With institutional companies seeking to innovate in a similar way as brick and mortar, to maintain relevance.
Conclusions – Banking Goes More Digital and More International
International payments continue to be one of the most exciting areas for businesses to expand to. But it’s a matter of who gets into it first and best, Fintech or otherwise.
The financial world has become a 24-hour economy, and that’s something that will continue to factor into the equation, both for Fintechs, institutional finance and their millions of users.