Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
How Banks, Fintechs, and Customers Win Together
Fintech Confidential | Michael King and Richard Nesbitt | Jan 21, 2021
In our recently published book The Technological Revolution in Financial Services: How Banks, Fintechs, and Customers Win Together, a group of expert contributors from North America and Europe share their insights on how the financial services industry will evolve in the coming decade. The context is the ongoing transformation in the financial services industry, which is being driven by three structural forces: heightened regulation that followed the 2008-2009 Global Financial Crisis (GFC), innovation fueled by new technologies and entrepreneurial fintech startups, and demographic trends with the rise of millennials and the retirement of baby boomers.
These forces are changing the competitive landscape of financial services, lowering barriers to entry and increasing competition from both inside and outside the industry. Our book outlines what we see as the successful strategies for financial technology (fintech) companies and incumbents, namely banks, insurance companies, and asset managers.
While there is much to learn from our contributors, this article shares our main conclusion and a few key takeaways.
We argue that the winning strategy for the coming decade will be for banks, insurance companies and asset managers to partner with fintech startups to deliver a superior experience to end-customers.
The media has portrayed fintechs and financial incumbents as rivals. But the real threat over the coming is coming from outside the financial services industry – from large technology companies such as the Chinese techfins (Alibaba and Tencent) and North American bigtech companies (Amazon, Apple, Facebook, Google, and Shopify). These global players have platform ecosystems with large and loyal customer bases, massive datasets on customer behavior, and well-known brands. Techfins and bigtech are bundling financial services with non-financial products to provide end-customers with the delightful, easy, convenient and lower cost experiences they desire.
See: Why Partnerships Are the Future for Fintech
Faced with these new entrants, we argue that incumbents need to partner with fintechs, combining their respective strengths to provide a better customer experience.
- Banks, insurance companies and asset managers are product-centric. These incumbents have millions of customers, expertise in risk management and compliance, funding and scale. But they view the world in terms of deposits, loans, payments, and investments. They see technology as a tool to reduce costs and increase profitability while meeting increased regulatory requirements. They are more focused on their shareholders than on understanding their end-customers.
- Fintech companies are customer-centric. Fintechs are better at understanding the customer’s needs and their financial journey. Fintechs leverage technology to solve customer pain points and offer a better value proposition. They have access to talent and are employing design thinking to develop innovative solutions that provide a delightful user experience.
So, the technological revolution highlighted in the title does not refer simply to the emergence of new technologies or the disruption from new entrants. It refers to a paradigm shift in financial services that refocuses on the end-customer, their experience and their lifetime journey.
Briefly, here are three more takeaways:
Technology is not a strategy, it is a tool for the execution of strategy.
Strategy is the answer to three questions: where is the organization today, where does it want to go in the future, and how will it get there. Technology can provide better tools for pursuing this strategy, but technological innovation is not the end goal of strategy itself. Technology does provide a sustainable competitive advantage; it is widely available and can be copied by competitors who are fast-followers. The biggest barrier to entry in banking is not technology or even regulation, but access to customers.
See: Does FinTech Substitute for Banks? Evidence from the Paycheck Protection Program
Trust in banking is paramount, supported by data security and privacy.
The loss of trust in incumbents following the GFC opened the door to new entrants including fintechs. But trust in financial services is intertwined with cybersecurity and data privacy. Cybersecurity has clearly become the biggest operational risk. The approach must be a shift in mindset from “if we are hacked” to “when we are hacked”. Finding it fast, disclosing it and dealing with it immediately, and minimizing the impact on customers will be critical. Data privacy is a second critical issue. Consumers and privacy advocates are acutely aware of the mixed incentives created by the advertising- based business models of Facebook and Google. This is one area where technology (such as blockchain) and new services (such as digital identity) can promote trust, by protecting customer data, privacy, and identity.
Open banking sits at the nexus of these concerns. We argue that the adoption of open banking -- in Canada and globally – will increase data security by putting in place a secure system for the transmission of data using application programming interfaces (APIs).
Regulation and risk management remain pillars of financial services.
See: The future of European payments: Strategic choices for banks
Regulation is not going away, nor should we want it to. Leading financial players – whether fintechs or incumbents – support higher regulatory requirements to weed out bad actors. We argue that maintaining a level playing field and avoiding regulatory arbitrage are important. Effective risk management will continue to be a driver of success in financial services. Incumbents possess this expertise. Fintechs and other new entrants will inevitably need to invest in risk management and compliance to be successful.
Authored by:
- Michael R. King, Lansdowne Chair in Finance, Gustavson School of Business, University of Victoria
- Richard W. Nesbitt , CEO, Global Risk Institute in Financial Services
This article appears as a featured article in NCFA's digital magazine, Fintech Confidential (Issue 3 Dec 2020). Click to read the latest thought leadership, insights and trends about Fintech in Canada:
Checkout NCFA's digital magazine, Fintech Confidential (Issue 3, Dec 2020) --> here
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