2. A white paper on Banking Reports by MarketResearch highlight significant qualitative and quantitative differences between five continents examined.
TRENDS IN FINTECH REVOLUTION
1. After the financial meltdown of 2008, the amount, and the seriousness, of legal regulations on banks have significantly risen. This was partially caution and partially some sort of retaliation from the side of the authorities and political decision makers.
2. Financial requirements have significantly tightened on banks. The amount and the quality of capital requirements have been heightened and risk‐ management requirements have become even more demanding than before. This makes it harder for traditional banks to take on risks, especially to land.
3. Mass presence of three fairly new technologies such as Smartphones, High speed Internet, Social media.
4. This new consumer behavior‐pattern has a name: Millennials. Millennials are best described by three key things that define their values: mobility, transparency and instant access.
5. Banks shocked the world in 2008. But, they shocked themselves even more – if possible. The financial services community came to the conclusion that strategic as opposed to incremental change is needed from within the incumbent financial establishment. Ever since World War II, the international financial community has seen a need for incremental change. But, this time the consensus was that something more is needed. This notion is what triggers the innovation from within the brick and mortar banking sector.
6. The financial community has suffered an unprecedented loss of trust in the eyes of the public. This distrust was especially severe from the Millennials. Their parents were the ones most hurt by the crisis (foreclosures, etc.), and they learned a lesson. This loss of trust is what makes banking as we know it so alien for a significant segment of Millennials. This emotional background is what triggers the innovation from outside the brick and mortar banking sector. This is what drives the engine in most of the FinTech companies.
FUTURE OF BANKING INNOVATION
1. Upward shift in the intensity of in‐bank innovation. Traditional banks are here to stay. But, they are to do much more innovations than they used to in the pre‐ crisis era.
2. Strategy and Innovation, Technology and Operations units and departments, Innovation Committees and other dedicated organizational elements are created across the banking industry to incorporate emerging technologies. Where is the right place of innovation in the organization of a bank? This is something that banks and consultants are still heavily working on. Innovative preconditions are often not given in the ultra‐orthodox and conservative corporate culture of banks. It is yet to develop bank‐management practices that nourish innovation.
3. Along with business analysts, banks are now actually hiring engineers and designers in almost the same quantity.
4. Banks have professional, but often painfully outdated, IT systems. Almost all banks struggle with legacy systems. We usually use an analogy here referring to the aviation industry where analysis shows that the single most powerful cost‐cutting advantage of low‐cost airlines, as opposed to the more established ones, is the lack of legacy IT‐systems.
MAIN PURPOSE OF BANKING INNOVATIONS
1. Customer centric - Banks sense that customers are often dissatisfied. Therefore, they try to come up with innovations that they hope will somehow mend this problem. FinTech companies think they are the ones to show the way when it comes to customer centricity. The key term they often use is ‘user experience’.
2. Attract new customers - For FinTech companies this aspect of innovation is the core one. Their very existence is based on the premise that innovative services attract customers.
3. Innovative Image - Banks see themselves as ’dinosaurs’ and they hold the – partially true – belief that clients see them as such. Therefore, large brick and mortar banks are becoming keen on starting projects that are aimed at making them look innovative. Most of these programs have real content, but some lack the depth beyond PR purposes. In a paradox way, FinTech companies are much more ambivalent about wanting to look innovative than large banks.
4. Pilot, test, experiment, create prototypes - Banks are traditionally super‐conservative, and they have little – if any – space in their organizational structure to experiment. FinTech gives them a way to get around that. The existence of FinTech startups is a test and experiment in itself. There are two major questions about this: (i) To what extent will they be quickly substituted by even newer FinTech companies doing the same thing better, by learning from prior mistakes? (ii) To what extent will these startups be able – and to what extent is this right ‐ to keep their entrepreneurial spirit, their ability to take on experimental risk as they grow?
5. Increase Loyalty - Banks are ambivalent about this. They think that innovations can be the exact thing that scares well established clients away. They got used to the existing status quo; they chose the given bank amidst the existing status quo. Will they not be scared away by all those new things? On the other hand, these banks see that a certain segment of their customers choose more innovative services. This ambivalence and these uncertainties often paralyze banks in taking substantial innovative initiatives. This is a key driver in FinTech innovation. To be always ahead of the curve, to be better than the existing banks and to be better than the fellow FinTech competitors. Research, however, shows that clients trying one FinTech service are inclined to try a competitor as well. The mechanism behind this is that in case they are satisfied with the new solution they will be curious how it works at other FinTech companies, and, in case they are dissatisfied, they will think that it is not the type of service but probably the specific company that dissatisfied them.
6. Make processes more efficient - Since 2008 major international banks have tried to go through a major cycle of cost‐cutting. They have realized that innovation is a primary tool to reach a sustainably lower cost‐level. In fact, there are many ‘win and lose’ type of cost‐cutting actions. But, innovation is a ‘win and win’ type of cost‐cutting framework. FinTech companies have little to do with cost‐cutting. Their cost structure greatly differs from the cost‐structure of brick and mortar banks. The greatest difference is not in the ratio of certain cost‐elements, but in the list of costs in itself: FinTech startups have very few cost items compared to brick and mortar banks. This great difference in the cost‐structure is a “natural cost‐cutting” in itself, no more “synthetic cost cutting” programs are needed.
7. To differentiate - We often hear among bankers the proverb: “Banking is a commodity”. Banking Reports see a trend in banks trying to differentiate themselves from fellow banks. This differentiation is a hard issue to handle since it is partially a positioning task, and positioning is a strategic question. Strategic thinking in the banking sector, in much of the last seven years (since 2008), have been preoccupied by survival and NPL issues, regulations, reducing risks and matching new regulatory and legal requirements. All in all, for brick and mortar banks, coming up with innovative products and services is a great opportunity to objectively differentiate themselves from competitors. However, it only can work if it is strongly backed by a positioning that is originating from strategy in the board room. : FinTech companies are differentiated from the existing status quo. But, in fact, qualitative research by Banking Reports points out serious problems and substantial opportunities here. Our research shows that FinTech companies are suffering from a ‘Double‐Differentiation Disorder’. This means that, on one hand, they try to differentiate themselves from the brick and mortar banks, but, on the other hand, they try to differentiate themselves from the fellow FinTech competitors.
(Source: MarketResearch)
(Source: MarketResearch)
