FinTechs and Traditional Banks

A case and some thoughts

In late January, before embarking on a six-month study and work trip to Europe, my son and partner Ignacio decided to open a bank account in Europe to transfer funds from Uruguay and operate with it during that period. He chose FinTech Revolut (www.revolut.com) founded at London in 2014 by Nikolai Storonski and Vlad Yatsenko, which is currently one of the fastest growing FinTechs in the world. The onboarding process, as usual in digital banks, was very simple and fast, and naturally completely online.

Before traveling Ignacio made two international transfers from an account in Euros that he has in Uruguay at a world class international bank: the first one to an account in a traditional Spanish bank to make the guarantee deposit for the rent of an apartment that will be his home and base of operations over the coming months, and the second one to his Revolut account for an initial value of one thousand Euros, just to test the operation of this mechanism. The transfer to the traditional Spanish bank arrived without problems in the usual timeframe, while the transfer to his own Revolut account never arrived, and after complaining to the issuing bank, he was informed that the transaction would not go through and that the funds would be returned to the source account, without providing any reasonable explanation for such behavior. The opacity shown in this transaction and its subsequent claim did not allow us to know for sure who exactly declined to process a transaction that was clearly legitimate and ordered by the genuine owner of the two accounts. The momentary solution was to open an account in a traditional Spanish bank, after Ignacio′s arrival.

?A dirty war?

?On 03/05/2023 I read an article published in the digital magazine “Global Banking & Finance Review” that you can read at https://www.globalbankingandfinance.com/customer-retention-in-the-digital-age-how-tech-helps-banks- stay-competitive/ of which I will reproduce the first three paragraphs (in my free translation), because they reminded me of Ignacio's incident with Revolut:

“FinTechs are revolutionizing the financial services industry, making it difficult for traditional banks to keep up. Challengers like Monzo and Revolut are leading the race, and some experts believe they could even outpace established banks.”

“This is not new news; Deloitte warned us in 2014 that challengers will erode the competitive advantages of traditional banks. The Revolut CEO even predicted the end of conventional banks in the next five years. But they have managed to hold their ground so far. The question is, for how long?”

“For us, the heart of administration is precisely the art of mobilizing and pushing together the intellectual resources of employees at the service of the company. That is why we constantly listen to them and what they tell us we apply to our decisions.”

Neither Ignacio nor I are unaware that Revolut's explosive growth was not without controversy, but the lack of transparency from "any financial institution in the international circuit" by refusing to carry out an obviously legitimate transaction, without giving any reasonable explanation, leads us to wonder if such behavior is not part of some kinf of a sabotage oy boycott against Revolut (and by extension, against similar FinTechs?) as a response to a competitor that is successfully challenging traditional banks in the market.

?Are FinTechs replacing traditional Banks?

?Many authors affirm that FinTechs are replacing traditional Banks, leveraging their young and highly qualified staff. They are 100% digital banks (also known as “neo banks”), characterized by their transparency, the personalization of their services, lower costs, and innovative products highly focused on the user. The focus of FinTechs is the customer, while in traditional banking the focus was the product.

Back in 2019 at the seminar "Digital Finance: The Importance of Fintech" (EALDE Business School), the author Francisco Javier Moreno mentioned that one in three traditional banking clients used a FinTech as parallel banking, which caused that between 2013 and 2017, investments in FinTechs multiplied by six, despite the fact that this new ecosystem was still in its embryonic phase.

Most consumers and clients of financial services are young people from generations X and Y, with lifestyle and consumption behavior different from those of the “baby boomers” generation. These new customers have become increasingly empowered, demanding from the market respect for their preferences and rewarding with their own preference those banks that understood that message and complied with it, regardless of whether they were incumbents or FinTech-type startups.

Those who understood this message and saw the opportunity to dispute a market in a process of profound transformation were precisely the FinTechs, starting to offer innovative services and products, with high value for "new customers", differentiating themselves from traditional banking through a series of advantages, such as:

·???????Much lower operating cost, which allows them to offer consumers cheaper financial services.

·???????Innovative, intuitive, and easy-to-use products and services, better adapted to the preferences of generations X and Y.

·???????Greater transparency, providing more detailed information to customers.

·???????FinTechs are more modern than traditional banks, they have less structure and a lot of talented young staff.

?History repeated?

Harvard University recognized the philosopher and businessman Honosuke Matsushita as the best businessman of the 20th century. In the 1980s, he was invited to a business forum in the United States of America, where he made a memorable speech, which is still considered a true modern management course. In one part of his speech, the American businessmen asked him who would win the battle of business management (between the USA and Japan) and I will reproduce part of Matsushita's answer below.

“I'm sorry to tell you that if you don't change your mind, we are going to win, and you are going to lose. There is not much you can do, because to do so you first have to change, since the reason for your failure is within yourselves. Your companies are built on the Taylor model, worse than that: your mentalities too. The leaders think, while the workers are only allowed to use tools, and the worst thing is that you are convinced that this is the best way to run a company.”

"For you, the essence of business administration consists in taking the ideas that the executives have in their minds and ordering the workers to execute them."

“We have left the Taylor model behind. We have learned that business is more complex and difficult, and companies struggle daily to survive in a dangerous environment without any valid prediction, competitive and surrounded by risks; our continued existence depends on the daily mobilization of the last ounce of human intelligence available in the company.”

?Matsushita's response and speech are lengthy and very enlightening but reproducing them in full is beyond the scope of this article. My goal is simply to use that example to point out that, just as Honosuke Matsushita told American businessmen that if they did not change their mindset and the way they run their businesses, they would succumb to those who already did, those traditional banks that do not see urgent changes in market demands and their inevitable impacts of transformation of their processes, products, services and strategy, will succumb to FinTech companies that quickly knew how to "read" those signals.

?The growth of FinTechs around the world is exponential. There are digital banks or "neo banks" in every country in the world, and they are competing for the market with traditional banks, which have several options, such as adapting their business model, or even allying with some of the emerging players. Some of the largest banks choose to support FinTechs with funding, and sometimes they buy them outright, thus avoiding a competitor and adding more value to their business. All these options are valid, unlike trying to boycott new competitors, which would be equivalent to trying to “cover the sun with one finger” and would be repeating the history of 20th century Taylor companies that failed to change their mentality.

?

José C. Nordmann

SME in real time Digital Counter Fraud

Member of the World Council for a Safer Planet

Member of ACFE (Association of Certified Fraud Examiners)