In recent years, traditional financial institutions have felt the profound impact of fintech (financial technology). Fintech companies use technology to provide innovative customer-centric financial services and solutions, disrupting and transforming aspects of the traditional financial industry, and often outpacing traditional banks and lenders.
Digital-only banks (neobanks) offer lower fees, higher interest rates, and a more user-friendly experiences than their traditional counterparts, and can expand their services to regions with limited banking infrastructure via mobile banking and digital payment solutions.
Mobile wallets, personal finance management, and peer-to-peer payment apps make customers' lives easier; cost-effective and efficient cross-border money transfers are challenging the dominance of traditional transfer operators; and the employment of data analytics and machine learning algorithms can quickly assess credit risk to provide faster loan approvals.
Fintech firms also leverage big data and analytics to gain insights into financial markets, investment opportunities, and risk management, and play a significant role in the development and adoption of blockchain technology and cryptocurrencies like Bitcoin and Ethereum.
The fintech world has disrupted the finance sector and continues to evolve and shape its future by leveraging technology to enhance accessibility, convenience, and efficiency in financial services.
Ignore fintech at your peril
It's imperative for traditional banks to embrace digital transformation in order to remain competitive and relevant in today's rapidly evolving financial landscape. Those that fail to keep pace with fintech innovations and evolving customer expectations may face several challenges and potential consequences:
- Loss of market share: Up against more convenient and user-friendly digital solutions, traditional banks that do not adapt may lose market share, particularly among tech-savvy and younger customers who are more inclined to embrace fintech alternatives.
- Diminished relevance: Fintech companies can disrupt various areas of banking, including payments, lending, wealth management, and more. Banks that do not innovate risk being left behind in multiple segments of the financial industry and becoming less relevant in the eyes of consumers.
- Reduced profit margins: Fintech companies often have leaner structures leading to lower operating costs and competitive rates and fees. If traditional banks cannot streamline operations to offer the same, they may face pressure on their profit margins.
To address these challenges, traditional banks are increasingly investing in digital transformation and adopting new technologies to remain competitive, enhance customer experiences, and leverage the advantages of both traditional banking infrastructure and fintech innovations.
The ability to strike a balance between tradition and innovation is key to the long-term success of traditional banks in a fintech-driven world.
How do banks compete with fintech?
Fintech companies have redefined customer expectations by offering user-friendly, tech-driven solutions that provide convenience, efficiency, and personalized experiences. To meet these rising customer demands and attract new generations of tech-savvy clients, traditional banks must invest in modernizing their technology infrastructure, enhancing their digital offerings, and streamlining operations.
Competing with fintech companies can be challenging for traditional financial institutions, but not impossible. Here are several strategies that they can employ to compete effectively with fintech competition:
- Embrace end-to-end digital transformation: This involves a comprehensive overhaul of all aspects of your operations, systems, and customer experiences to become fully digitally enabled. It requires the integration of cutting-edge technology, digitization of processes, data-driven decision-making, and a customer-centric approach, ultimately aiming to enhance efficiency, agility, and the ability to deliver innovative financial services in the digital age. Investing in modernizing your technology infrastructure, systems, and processes includes adopting cloud computing, automation, and agile development practices to become nimbler and more responsive. Opening your APIs (Application Programming Interfaces) up to third-party developers allows for the creation of new services, expanding your offerings and reach. Investments in digital marketing will help you reach a broader audience and connect with customers where they are.
- Focus more on the customer experience: Focus on creating user-friendly digital interfaces for your customers. Make your online and mobile banking experiences as seamless and intuitive as those offered by fintech startups. Leverage data analytics and AI to gain insights into customer behavior and preferences that can inform your product and marketing strategies. Tailored recommendations and personalized experiences can help retain and attract customers. Educating your customers about the benefits of your digital services and how to use them effectively can ease the transition to digital platforms. Remember, while technology is essential, a personal touch and the ability to address customer concerns promptly can set you apart from fintech competitors. Leverage your institution's long-standing reputation and customer trust as a competitive advantage. Highlight your commitment to security and reliability in your marketing efforts.
- Update the work culture: Innovation should not be limited to external partnerships; internal innovation can be just as impactful. Foster an agile work culture that encourages innovation and experimentation. Encourage employees to propose and test new ideas and provide the necessary resources and support to bring these ideas to fruition. Invite internal teams to explore and develop new products and services. Invest in the continuous education and training of your employees. Ensure that they are up to date with the latest technologies and trends in the financial industry.
- Compliance and regulation: As fintech continues to evolve, regulatory requirements may change. Regulatory technology companies assist financial institutions in complying with complex requirements by providing tools and solutions for automating compliance processes and monitoring regulatory changes. Traditional banks that do not stay current with new regulations may face compliance issues and potential fines. Stay informed about regulatory changes and ensure compliance with evolving regulations. Proactively work with regulators to create a conducive environment for innovation.
Fintech: It’s not a one-horse race
It’s important to remember that traditional banks have some key advantages over fintech startups that they can leverage.
Firstly, many traditional banks offer a wide range of financial services under one roof, including savings accounts, checking accounts, mortgages, investment products, and retirement planning. Customers often appreciate the convenience of having all their financial needs met by a single institution. With their extensive customer networks and a large, established customer base, this can provide a significant advantage when cross-selling products and services.
Traditional banks also often have physical branch networks, providing customers with in-person services, such as access to ATMs, safety deposit boxes, and face-to-face consultations with banking professionals. These physical locations can be especially valuable to customers who prefer traditional banking interactions or need access to physical facilities.
But more importantly, traditional banks, especially those with long histories and strong reputations, often enjoy a high level of customer trust and brand recognition. Many customers feel more comfortable entrusting their financial affairs to well-established institutions with a history of stability and reliability. Many banks have long-standing relationships with their customers, including personal bankers who provide advisory services and assist with financial planning. These relationships can foster loyalty and trust.
So, there is certainly room for traditional banks to win a larger share of the digital finance market. And some prominent traditional banks are doing just that in very creative ways.
From competitors to allies
Fintech has not only reshaped the industry but also opened opportunities for collaboration, allowing banks to tap into the innovation and agility of fintech startups. By harnessing the power of technology and collaborating with fintech partners, traditional banks can position themselves as innovative financial institutions, improve customer satisfaction, and ensure long-term sustainability in an increasingly digital world.
Several prominent traditional banks have teamed up with fintech companies to their mutual benefit.
- In 2016, JPMorgan Chase entered a partnership with OnDeck to leverage OnDeck's technology for small business lending. This partnership allowed JPMorgan Chase to streamline its small business lending process and offer faster and more efficient access to credit for its small business customers. OnDeck's technology, which uses data analytics and algorithms to assess creditworthiness, helped JPMorgan Chase to make quicker lending decisions and expand its lending capabilities to a broader range of small business customers.
- In 2016, Goldman Sachs launched Marcus, a fintech platform that offers personal loans and savings accounts directly to consumers. This move marked a significant departure from Goldman's traditional investment banking focus. Marcus leverages fintech technology to provide customers with competitive interest rates on savings accounts and personal loans with no fees. The partnership benefited Goldman Sachs by diversifying its revenue streams and expanding its reach into retail banking. It allowed the bank to tap into a new customer base, particularly individuals seeking personal loans or high-yield savings accounts. The fintech approach of Marcus allowed Goldman Sachs to offer these services with a customer-centric, user-friendly digital interface, appealing to customers seeking modern, hassle-free banking experiences.
- BBVA (a Spanish multinational banking group), invested in Atom Bank (a digital-only bank based in the United Kingdom) and formed a strategic partnership with the fintech firm in 2015. This partnership allowed BBVA to leverage Atom Bank's digital expertise and innovative approach to banking. Atom Bank, in turn, benefited from BBVA's financial support and global presence. The collaboration enabled BBVA to gain insights into digital banking and mobile app development, helping it enhance its own digital banking services. Atom Bank was able to access resources and expertise from BBVA, enabling it to expand its presence and offerings in the UK market.
These partnerships illustrate the potential for established financial institutions to adapt to changing consumer preferences and leverage fintech capabilities to offer competitive services and to harness the innovative capabilities of a fintech partner to accelerate digital transformation and expand its reach into new markets. The mutual benefits of such collaborations mean both parties gain valuable insights and resources to stay competitive in the evolving financial landscape.
Embracing digital transformation and collaboration for success
In recent years, traditional financial institutions have faced the transformative impact of fintech, where technology-driven innovations have disrupted and reshaped the financial industry and revolutionized how customers access and manage their finances.
Yet, for traditional banks, the imperative is clear: adapt or risk losing relevance in this rapidly evolving landscape. Embracing digital transformation, prioritizing customer-centricity, and fostering innovation, while leveraging their strengths in trust, customer networks, and brand recognition are crucial steps forward. Traditional banks are now in a strong position to collaborate with fintech, forging alliances that can drive innovation and ensure a sustainable future in an increasingly digital world.