Banks are solid, grand and re-assuring. But banks are under threat from regulators, changing customer behavior, the proliferation of channels, new frauds, legacy software and now Fintech. Fintech do not hide their intent to go after the bank’s business or to provide an alternative that renders the banks’ business obsolete.
Banking is going digital. An internet-only bank can exist on servers with no physical presence. Banks cannot offer banking services without technology. But banks have never thought of technology as a key raw material. For Fintech, technology is the driver for their business. As technology looks for new areas, banking beckons with its huge volumes, large money, and no technical challenge! Fintechs can not only digitize banks but they can think of alternative means of doing banking in a purely digital environment which would not be possible to a brick and mortar setup. Think of Vinyl records, tapes, CDs, MP3 players and now audio streaming and how delivering music has changed from a concert hall, radio, home theater, Walkman to a smartphone! If you can make payments without banks (mPesa), keep money in digital wallets, crowd source money for your startup through a website– why will the customers go to banks?
Customers will go because banks still enjoy their trust and confidence. Banks are handicapped by their organization structure, controls, regulations, earnings pressure from shareholders and the markets and fail to respond to changes fast enough. They have to respond with technical banking solutions superior to the Fintechs and leverage their own strength as a part of these solutions (extensive brick and mortar presence through branches, geographical reach, large customer base, access to payments and other networks, money, and marketing muscle etc.) which the technology players lack. There are defensive mechanisms like acquiring startups (e.g. Simple was acquired by BBVA), using legal, regulatory and other means to thwart the technology players(banks in India allow one-way funds transfer from non-banking digital wallets citing regulation). But the attack is the best form of defense and nothing works like turning the tables around and coming up with technical solutions that outdo the Fintechs.
How do banks do this? One way to is to sandbox such initiatives, completely isolate it from the bank and incubate it like a start-up. Set up a bank within a bank, but without limitations. It will not be linked to the bank’s legacy system and will be free to use a completely new hardware and software platform will be well funded, will use agile and continuous delivery to deliver small solutions and grow them day by day. Such initiatives will NOT be burdened to work with the rest of the bank. E.g. a digital wallet project, a money transfer service, a mobile-only savings account. This ‘ bank within a bank’ will treat the parent bank as an external entity and will connect with it just as any startup would do with another bank. Once an initiative succeeds the parent bank can then decide to let it run independently or to integrate it with the parent bank. A good example of this is Digibank from DBS which is run independently of the DBS legacy environment. The unique solution (a wallet and savings accounts) Digibank reaches out to people who are not DBS customers also. All that they need is a smartphone and they are into Digibank without anyone from DBS being there at all.
It reminds me of the time when Citibank started installing ATMs in India in the nineties and had the largest base of ATMs then. Everyone said that with few branch and the ATMs Citibank will beat the large Indian banks just by looking at the popularity of the “Suvidha” account launched in two cities in India which were to be accessed from ATMs only. But once ICICI bank and later on SBI started rolling out ATMs they absolutely steam rolled any challenge from Citibank and others. These are early days for Fintechs and it seems that they are all set to wipe out banks. But a large number of banks are toying with all kinds of technology and it is just a question of time before they master the tricks of technology and roll out new banking products and services. The Fintechs will find themselves at the receiving end and be looking threatened. The banks have this knack for survival over the ages and especially with their back to the walls they will fight and emerge victoriously.