What happens when a bank becomes its own challenger?
There’s been a lot of talk about fintech companies coming along to disrupt the financial industry
Backbase is on a mission to re-architect banking around the customer.
There’s been a lot of talk about new fintech companies coming along to disrupt the financial services industry, and to some extent this is happening. Traditional banks have been rightly fearful of losing custom to new ‘challenger banks’ built on digital-first, mobile-first principles. However, the flood of fintechs hitting the market has also opened up a wealth of opportunities for traditional banks.
There are many good reasons why banks and fintechs should collaborate rather than compete with each other. While traditional banks have a large customer base, yet struggle to bring new, innovative products and services to market quickly, fintechs bring cutting-edge technology but often lack banking licenses and have only a small audience. There’s a natural fit here, where a cooperative approach can benefit both parties, and crucially the customer too.
This message seems to be getting through to traditional banks. In the World Retail Banking Report 2017 from Capgemini and Efma, more than 90% of traditional banks said they had already (or planned to) collaborate with fintechs. While fintechs do pose a threat to established business models, banks don’t necessarily consider them to be simply competitors. Partnerships – whether through white-labelling, licensing or acquisition – are coming thick and fast. For instance, think JPMorgan Chase and OnDeck Capital, or HSBC and Tradeshift.
And as well as collaborating with them, there’s a lot that banks can learn from fintech startups, too. The methodology around many of these startups has revolved around the principles of being ‘agile’ and ‘lean’. Traditionally, these aren’t concepts you would normally associate with banks. Instead, you might think of monolithic organisations mired in bureaucracy and hampered by archaic IT infrastructure. If banks want to replicate the efficient processes and speed-to-market of these fintechs, serious strategic changes are required.
But there are some good examples of banks who have decided to take a radical approach in order to quickly develop customer-centric products and services. OTP Bank has launched a digital-only bank called Touch Bank, while Mediobanca group developed an entirely new banking brand, CheBanca!. In effect, they have become their own disrupters, controlling the pace of change and setting their own rules for the game. Other big banks are setting up their own internal innovation labs specifically to grow a culture of agile product development – for example, ING’s Innovation Studio.
So how can established banks take a leaf out of the fintechs’ book? Well, there are a number of steps they need to take.
Digital layers. Firstly, there needs to be a digital platform on which new products and services can be built quickly. This platform needs to link into the bank’s back-end in order to access customer data and authorise various functions. However, it doesn’t require the bank to completely replace its legacy IT infrastructure. Instead, banks should look to build a digital layer that directly plugs into the back-end while providing a versatile platform for innovation.
Thinking outside-in, not inside-out. In the past, many banks have been guilty of taking the wrong approach to the services they build, selecting the products that reflect existing capabilities, or those that are the most profitable. Instead, they should think about things from the customer’s point of view. What services do they want? Through which channels should they be available? This outside-in thinking is the key to building truly customer-centric products.
Reduce bureaucracy. While long-established organisations have all sorts of compliance, governance and legal issues to consider, with many different departments and layers of management, everything must be done to provide project teams with the freedom to innovate. These small, self-contained teams should be given a blank cheque, and think outside any existing restrictions.
Regular development cycles. Within each project team, there should be a number of iterative cycles of building, testing, analysing and improving for each new feature. Setting short deadlines and moving quickly on to the next feature is how many fintech startups drive innovation. This agile methodology means products can reach the market as fast as possible.
Feedback loops. Real-world testing with small groups of customers is the best way to test a product or service – everything from the overall concept to the minor functions should be exposed to ‘beta’ users. But banks also need to have an efficient way of gathering and assessing feedback, using this to fix bugs and upgrade functions that aren’t quite working out.
It isn’t an easy thing to do, and requires a change of mindset, but banks that are prepared to disrupt themselves can put themselves in the best possible position to create products and services that delight existing customers, and attract new ones too.