In the rapidly evolving world of finance, the rise of financial technology (fintech) companies has disrupted traditional banking models in a big way, introducing a wave of innovation that challenges the status quo. Younger generations in particular have adopted non-traditional banking methods, with 18-24 year olds expressing the largest degree of trust in fintech, and largest degree of distrust in banks, across all age groups.
As of July 2023, publicly traded fintechs represented a market capitalization of $550 billion, a two-times increase versus 2019. VC funding continues to pour in with increased amounts annually. The global fintech market is expected to be worth an incredible $917.17 billion by 2032.
Banks have no choice but to take on the challenge of fintech head on- whether through competition, improvement, or collaboration.
This in-depth exploration offers a comprehensive view of the shifting landscape and provides actionable insights for traditional banks.
The Fintech Revolution: Unpacking Growth Drivers
Fintechs have grown exponentially due to several key factors:
Customer Centric Solutions
The success of fintech is largely driven by its focus on customer needs and behaviors, which contrasts with the one-size-fits-all approach historically seen in traditional banking. Fintech startups use advanced analytics and machine learning to offer personalized financial advice and products.
Companies like Revolut and Chime, for instance, have tailored their offerings to provide real-time spending analytics and no-fee checking accounts, which resonate well with younger, more tech-savvy consumers.
Analytics and Personalization
Heavy utilization of mobile apps means improved ability to track user habits. These advanced analytics give unprecedented access into the spending patterns, customer journey, and credit history. Companies can personalize offerings and customer experience individually.
Regulatory Innovation
Fintech companies often operate under different regulatory expectations, which can be less stringent compared to traditional banking regulations. This aspect was highlighted in a World Economic Forum report, which discussed how regulatory sandboxes are used in jurisdictions like the UK to allow fintechs to test and refine innovative financial services without the full weight of regulatory compliance.
This allows fintech companies to reduce barriers to entry for customers, allowing the unbanked/underserved access to financial services. There are talks of this changing in the near future, but the details and scope are currently unknown.
Global Reach
Digital-first approaches allow fintech companies to easily expand internationally without the need for physical branches. This capability is particularly effective in reaching underbanked regions of Africa and Asia, where mobile penetration is high. Companies like M-Pesa in Kenya have revolutionized mobile money, providing financial services to millions who previously had limited access to traditional banking.
This reduces their overhead and makes it harder for brick-and-mortar banks to compete price wise.
Fintech innovations have streamlined cross-border transactions, making them faster and cheaper. Companies like PayPal, TransferWise (now Wise), and Revolut simplify international money transfers and currency exchange, supporting global trade and personal transactions.
Strategic Responses for Traditional Banks
To navigate this competitive landscape, traditional banks need to adopt several strategies:
Updating Legacy Systems
Fintech firms operate on agile platforms that are inherently more adaptable to technological advancements than the legacy systems used by many traditional banks. For example, fintechs leverage cloud computing to scale operations rapidly and cost-effectively.
“Back in my Entrepreneurial class at Babson, this was referred to as a ‘Monkey vs. Gorilla’ situation. Essentially, it’s easier for the Gorilla (the banks) to scale but harder to quickly change their direction and path, while the Monkey has agility and limited barriers to entry, but difficulty with scale. That’s fintechs advantage- an ability to quickly adapt.” -Heitmeyer Senior Director of Advisory and Consulting Services, Robin Collins.
In addition to the enhanced security and regulatory efficiency, updated technology is essential to improving customer experience. Modernized UX is one of the primary drivers of fintechs success, streamlining access to accounts, loans, and investments. These systems can also benefit banks with advanced analytics and insight into customer habits.
You can read an in-depth report on updating Core Legacy Systems here.
Digital Transformation
The importance of improved digital interactions cannot be understated. Neobanks have been developed entirely technologically with no brick-and-mortar locations. Chime retains over 14 million members without having a single physical location.
The American Bankers Association reports that 48% of Americans rely on mobile banking. A system which banks have embraced but may lag behind their fintech competitors in usability.
Gen Z is particularly invested in this realm. A 2023 report by the World Economic Forum outlines strategies traditional banks can use to integrate digital services to attract their generation.
“Generation Z is very much a digital native group, and in-app experiences are key to their happiness with the banking platforms. They want personalized digital experiences,” adds Collins.
It’s imperative for banks to modernize their legacy systems and infrastructure. Adopting technologies such as blockchain for enhanced security and transparency, and artificial intelligence for improved customer service and operational efficiency, is crucial. For instance, JPMorgan Chase’s use of blockchain technology to develop the JPM Coin demonstrates how traditional banks can innovate in payment technologies.
Partnerships and Collaborations
Banks are increasingly exploring partnerships in lieu of direct competition. Collaborations between banks and fintech firms can lead to innovative solutions that benefit both. Banks bring scale and regulatory expertise, while fintechs bring agility and tech know-how. Goldman Sachs’ partnered with Apple to launch the Apple Card, which combines Goldman’s financial experience with Apple’s user experience expertise. Citibank leads the pack with 15 FinTech acquisitions to date, including moves into digital healthcare.
Competition is inevitable, but exclusively pursuing that path over any sort of collaboration is expensive, resource intensive, and potentially futile. While BBVA gained experience and utilized Simple to transform their digital core experience, Simple was eventually dissolved.
Integration of Fintech Solutions
Banks frequently integrate fintech solutions to enhance their digital offerings, reduce costs, and improve customer experience. Examples include:
- HSBC & Quantexa: HSBC partnered with Quantexa, a fintech firm that uses big data analytics to fight financial crime. This partnership helps HSBC utilize advanced analytics to detect potential money laundering activities across its global branches.
- Barclays & Flux: Barclays invested in Flux, a fintech startup that provides digital receipts and rewards linked directly to payment cards. By integrating Flux’s technology, Barclays offers its customers itemized receipts and rewards within its app, enhancing the digital banking experience.
Joint Ventures
Sometimes, banks and fintech companies go a step further by creating joint ventures to explore new markets or co-develop financial products. For instance:
- BBVA & Anthemis: BBVA, a Spanish multinational bank, has partnered with fintech venture builder Anthemis to establish a venture creation studio in London. This studio focuses on building fintech startups from scratch, exploring new business models in finance.
These collaborations reflect a broader trend where banks recognize the need to adapt to a digital-first world and view fintech partnerships as a strategic approach to achieve this. By combining resources, expertise, and technology, both banks and fintech companies can more effectively address evolving market demands and regulatory challenges.
Revamping Regulatory Compliance
Banks should work closely with regulators to create a more favorable environment for digital innovation. This includes advocating for balanced regulation that prevents stifling innovation while protecting consumers. With increased regulatory scrutiny and capital requirements coming down the pike via Basel III, banks and regulators need to work together to level the playing field, protecting both traditional financial institutions and their customers.
Collaboration on Standards and Guidelines
Banks and regulators sometimes work together to create guidelines that ensure fintech innovations align with national and international compliance standards. These efforts often involve consultations and joint committees.
- Example: The European Banking Authority (EBA) often collaborates with major EU banks to draft regulatory technical standards and guidelines that include input on fintech developments. These guidelines help ensure that new fintech products or services align with existing banking regulations and are safe for consumer use.
International Cooperation
Given the global nature of many fintech operations, banks and regulators also engage in international efforts to harmonize regulatory approaches and standards, facilitating cross-border fintech services while managing risks associated with money laundering, terrorism financing, and cyber threats.
- Example: The Global Financial Innovation Network (GFIN), initiated by the FCA and joined by regulators from over 50 countries, aims to foster international collaboration among regulators, banks, and fintech companies. This network facilitates understanding and cooperation to shape regulation that supports international scaling of fintech innovations.
Educational Initiatives and Workshops
Regulators and banks often hold joint educational initiatives to keep each other informed about the evolving financial landscape influenced by fintech. Workshops, seminars, and conferences are common platforms for such interactions.
- Example: The Federal Reserve Bank of San Francisco holds regular fintech workshops involving both community and large banks. These workshops focus on educating bankers about emerging fintech trends and regulatory issues, promoting a proactive approach to compliance and collaboration.
Through these various methods, banks play a pivotal role in shaping the fintech regulatory landscape, ensuring that innovations benefit consumers without compromising the security and stability of the financial system. This cooperative approach not only helps fintechs navigate complex regulatory waters but also fosters a more inclusive and resilient financial ecosystem.
Enhancing Customer Experience
This involves redesigning the customer journey to be more intuitive and engaging. Banks need to invest in omnichannel solutions that deliver seamless service across digital and physical touchpoints. Citi Bank, for example, has developed a comprehensive mobile app that allows customers to manage nearly all aspects of their financial life remotely.
“A major challenge for banks here is getting legacy staff to ‘think like a fintech’. Thinking far outside of the box to educate their teams on new strategies and implementation. This is where Heitmeyer is often brought in to assist. Deploying resources with experience in these new spaces to help legacy teams build out and integrate newer consumer experiences, without pulling them away from existing projects.”
Innovation Culture
Developing an internal culture that embraces change and promotes innovation is essential. This could include setting up dedicated fintech hubs, investing in technology incubators, and continuously training staff on emerging technologies.
FinTech attracts new talent with flexible work environments, large salaries, and stock options, offsetting the volatility that comes with startups in burgeoning industries.
Banks need to invest in young talent and adapt to the fluctuations of modern workplace culture.
Accelerators and Incubators
Many banks host accelerators or incubators to nurture fintech startups, providing them with funding, mentoring, and access to their networks. This can lead to long-term partnerships and integration of innovative solutions. Examples include:
- Wells Fargo Startup Accelerator: An initiative by Wells Fargo to invest in and support fintech startups with innovative solutions that align with the bank’s business strategy. The accelerator provides funding, mentorship, and commercialization assistance.
- Scotiabank’s Digital Factory: Scotiabank established the Digital Factory to foster innovation and collaboration with fintechs. This initiative focuses on revamping customer experience through digital solutions by working closely with technology innovators.
Where Heitmeyer Comes In
Heitmeyer Consulting has worked exclusively in the financial services industry for over 25 years, retaining a network 100,000+ strong of consultants and SMEs to be rapidly deployed to your specific problem. This includes a large array of specialists in fintech, digital banking, and emerging strategies. Combined with our internal team of senior executives in Advisory and Consulting positions, we develop partnerships with our clients designed to create scalable programs that continue to expand long past project completion.
With the current landscape of digital banking systems and increased competition from fintech, Heitmeyer has been brought into major banking institutions to update core legacy systems without pulling teams away from their regular duties. Contact us today to learn more about the strategies we use to rapidly get you up to speed, and at a reduced cost compared to major global consulting firms.
