New to market players are challenging banks’ traditional markets, while other players are splitting the sector at the seams. Banks are being challenged by agile Fintech firms eager to capture some of the market share.
“Being attractive to consumers who are moving away from the traditional idea of a bank and now use their mobile phone as their main tool is an important and substantial shift.”
The emergence of new technologies has shaken the banking sector. Financial entities are finding it hard to weather the behavioral changes brought about by new technology and a new generation. This has made it difficult for banks to transition to a less rigid paradigm which is more open to innovation. One of the problems is that their expectations: customers expect more accessibility and reliability, which may be more available at other other digital organizations. With the rigid structure of banks, Fintech firms are increasing in popularity as they answer to changes in customer expectations.
Improved customer experience has become an obsession across the industry. Traditional banks are often seen as reluctant and slow in accepting change. Consumers today, for example find mobile banking an appealing tool to maintain their financial portfolios.
Banks vs. Fintechs
Banks still have had an advantage over other fintech players. However, with the lines between banking and fintech continuing to blur, banks need to continue to seek new sources of value in their relationship with other players.
This new shift has led to new challenges. In the short-term, the cycles for new technologies to implement will be much shorter. Banks are good at suggesting how the processes should be, but the hierarchy of their organization limits their agility in executing new developments and in being open enough to carry out collaborative projects with other partners. In the long-term, the ‘technology debt’ of their legacy systems will cause difficulty in making changes at the required speed. Security concerns relating to new or non-standard technologies are two of their biggest challenges moving forward. Fintechs offer the flexibility that enables them to work more efficiently, implement and innovate to change faster. However, the ‘trust-based’ environment from which they have emerged is yet to be fully tested at scale in financial services.
M-Pesa , the mobile phone based money transfer, financing and micro financing service launched by Vodafone in 2007 sets a great example years ago. M-Pesa identified the difficulty for customers in Kenya to access a physical bank and therefore developed a branch-less banking service utilizing the mobile phone. Users can deposit, withdraw, transfer money and pay for goods and services using a PIN secured SMS text. M-Pesa has been applauded for giving millions of people access to a formal financial system in large cash-based societies where accessibility to alternatives may be difficult. Today M-Pesa has expanded its reach to countries like Afghanistan, South Africa and India, with additional markets to roll out.
In this competition, banks should bring their strengths to the table. One of the key fields of competition is distribution; the channels through which banks connect with their clients. Traditional players must benefit from their experience in relationship management by understanding the needs of their clients, or using the trust they built from clients or risk management programs to compensate for the shortcomings of Fintechs. They must recognize that they can create greater value than new, “inexperienced” players with less mature relationships.
One field in which banks lost some of their market position (which they later recovered) is that of payments. Eight years ago, other competitors started to take the lead and this meant that these entities began to receive the support of large payment processors. This then spurred on technology companies to search for solutions which would cause them to be left behind. Traditional banks have ceased to be the sole participants in this field but they have learned to work alongside the other firms more effectively. They have also developed better collaboration models, specifically in the payments processing world. Take Apple Pay, a great example of collaboration around e-wallets. PayPal is also both a disruptor and collaborator, and is now one of them most widely accepted payment methods globally.
New technologies brought by Fintechs continue to challenge the status quo of the banking industry. They are more agile in adjusting to customer and market needs. Banks can follow the lead and adapt to the new technologies available, without becoming a dinosaur in this customer-centric era.