McKinsey’s Global Banking Annual Review 2021 revealed that banks are trading just at their book value, versus non-banking financial institutions, which are trading at 1.3 times their book value. This is despite the fact that the financial system as a whole gained more than 20 percent in market cap (about $1.9 trillion) from February 2020 to October 2021. Fintechs are quickly increasingly their hold on the banking industry. As of November 2021, there were 10,755 fintech start-ups in the Americas.
According to KBV research, the size of the global neo-banking market is expected to hit $333.4 billion by 2026, at a CAGR of 47.1 percent. For banks, this is indeed a wake-up call to delve deep and find ways to turn this threat into an opportunity to recapture their revenue and customer base.
Several factors have contributed to the growth of fintechs – including the ability to provide personalized customer experience, greater financial inclusion, and products that address specific financial needs, with quick access and speedy service. Typically, fintech apps run on the latest technologies in a fast-paced, responsive environment that makes such value additions possible.
At the same time, 57 percent of respondents to the recently released ‘Innovation in Retail Banking Report’ from Efma stated that their digital deployment was partial or that digital investments were not delivering as expected.
The question then is, how can banks mirror the operations of these fintechs, while also capitalizing on their inherent advantages of scale and reach.
How can a bank think like a fintech?
For banks to emulate the behavior of fintech, it is important that they rethink their organizational structure in favor of a flatter structure that allows for greater agility and responsiveness. Also, customer-response teams need to be more cross-functional with product experts, marketing, sales and branch staff working cohesively to deliver superior customer experiences. This also requires gathering customer insights gleaned across various touchpoints during the customer journey. Also, last mile employees in customer facing roles must be empowered with the tools, skills, and data to deliver solutions to customers, rather than merely redirecting them to the next level.
The work environment needs to evolve too to allow for hybrid working, part-time work, and other models that are a part of today’s gig economy. Building a culture of continuous learning in line with changing dynamics in the financial services market is essential for banks to counter the threat posed by fintechs.
Some ways to accomplish these goals are:
- Build a Digital Twin: Given that banks often have to grapple with complex legacy architecture which could hold them back, building a digital twin that is separate from existing infrastructure can help. One great example is Marcus by Goldman Sachs, created as an online-only bank to add to the 150-year-old Wall Street investment bank’s traditional offerings. DBS’s Digibank, a branchless, mobile-only bank is another great example since it offers all the functionalities of a physical bank, and has gained over 1.8 million customers in India, within 18 months of its launch.
- Acquire the Right Skills: Banks can choose to partner with fintechs or even buy them out rather than trying to develop the skills inhouse. The bank then becomes a collaborator in the ecosystem and expands capabilities quickly since any lacunae can be supplemented by a partner with those capabilities. This is a win-win for banks and fintechs as the latter will have the scale and reach that they could not achieve alone. A great example is RBL Bank’s digital transformation showcases the incredible journey of a regional, traditional bank becoming lean, responsive by leveraging a large pool of the partner ecosystem to build and deliver compelling digital propositions.
- Participate in Building the Ecosystem: Banks can engage the start-up ecosystem in conducive geographies so that they have a front seat view of the changing dynamics and are empowered to drive change. For instance, DBS Bank in Singapore sponsors fintech events, providing a sandbox environment and use cases for start-ups. The bank also undertakes incubation of start-ups providing funding and support. Such an exercise can provide powerful insights to the parent organization too and help shape its journey.
Staying relevant in the changing context
With customers becoming more demanding, countries offering pushing for real-time payment mechanisms, and open banking picking up, banks need to act fast. However, irrespective of the approach that they eventually choose, any strategy for the future must be cloud-first, API-first, ecosystem-first, mobile-first, and most importantly, customer-first. In addition, using the power of AI to leverage ML, deep learning, robotics, analytics and more is all important.