Fintech vs Traditional Banks: Competition or Collaboration?

Fintech vs Traditional Banks: Competition or Collaboration??by Yvonne de Ville?

For a long time, customers have been dictated by banks as to the financial products that are offered plus when they were available to customers. Customers have tolerated the lack of technology found at traditional banks to improve their service to their customers. But with fintech on the rise, banks are struggling to keep up and offer customers the innovation they crave.

Are fintech providers and solutions a friend or foe? It depends on whom you are asking. If you are asking the average person, the answer is most likely to be YES. However, the opposite answer of NO is expected if you ask the banking institutions as fintech solutions are providing to be a thorn in the side of banks. Can there be a compromise? If you look at the present scenario, it seems like steps to compromise are being taken. Moving forward, both fintech providers and banking institutions need more collaboration to overcome this present competitive rivalry.

Competition (Past and Present)

We cannot be too critical of the financial products and services that the banks have invested in over the last few decades. We have seen banks introduce automatic teller machines, credit cards, debit cards and in recent years, internet banking and mobile banking to appease their customers. (1) FinTech providers have disrupted the financial markets with their new innovative solutions. FinTech providers provide the differentiation of financial products, services and their delivery to the customer.

However, the banking industry has been sluggish to respond to the fintech revolution for many reasons. The banks’ legacy is built on using old complex mainframe technology and this mainframe technology is hosted on aged and outdated infrastructure. The outdated technology and infrastructure have not been kept up to date and thus cannot support the latest digitally advanced products and services that are offered by fintech providers. The investment cost would be enormous to replace the old technology and infrastructure and banking institutions need to be able to justify the investment cost.

FinTech providers have a competitive advantage over traditional banks in five ways: (2)

1.??????They are taking advantage of the latest technology platforms.

2.??????They are using alternate data sources to be able to compete with the banks.

3.??????They are participating across a wider range of business and service networks. This helps them to offset brand and advertising disadvantages.

4.??????They are benefiting from the lack of product and service offerings by banks.

5.??????They are capitalising on providing fintech solutions when people need them.

The Forward Pathway for Banking Institutions

The banks can’t stay the way they have traditionally been, or they will lose their positioning in the marketplace. Here are some options that the banking institutions can think about in their present position.

1.??????No change – The banks may not do anything. They may keep their present business model as is, but the consequences would be dire. Existing FinTech providers would continue to strengthen their position. New entrants would threaten the market with newer FinTech solutions.

2.??????Move in line with FinTech Providers - The banks can play the same game as FinTech companies. The banks need to move forward with their financial ecosystems and be more innovative with their financial products and services plus work towards meeting the needs of their customers. Failure to meet the needs of their customers will see an increase in the number of FinTech providers and will likely see more bank closures and loss of jobs. It may get to the situation that FinTech providers will move away from the disruption stage (our present scenario) to a more futuristic scenario of powering the banks. (2)

3.??????Collaboration - Banks could build better financial ecosystems for their customers if they took the time to collaborate with FinTech and BigTech companies. (3) The banks will need to support the collaboration with investments whether it is with their in-house developers or contracting third-party FinTech providers to supply the solutions. (1)

4.??????Subsidiaries – Banks can consider setting up their FinTech subsidiaries. The benefit of setting up a subsidiary is that the bank has full control and ownership of the FinTech solutions they develop.

5.??????Incubation/Acceleration Programs – Similarly, the banks could establish their own incubation/acceleration programs and develop newer solutions that will outsmart the present fintech solutions.

6.??????Mergers and Acquisitions - It is possible that we could see more consolidations in this industry through mergers and acquisitions. (2) As the FinTech industry becomes more competitive, Fintech companies are likely to merge with or acquire other fintech companies. Banking institutions have the opportunity to buy out more sophisticated partners who provide fintech solutions.

Famous Quote

“Banks have to upgrade themselves, or risk being burnt to the ground.” JP Nicols Mirror Review Quotes

References

(1) Toptal. Fintech and Banks: How Can the Banking Industry Respond to the Threat of Disruption? Source: https://www.toptal.com/finance/investment-banking-freelancer/fintech-and-banks

(2) Deloitte. Closing the gap in fintech collaboration. Source: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-dcfs-fintech-collaboration.pdf

(3) Deloitte. Interbank ecosystems. Source: https://www2.deloitte.com/xe/en/insights/industry/financial-services/bank-collaboration-ecosystems-and-bigtech.html