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Banks and Fintechs - Is it a Match made in Heaven!
By Zubair Ahmed, SVP, Head of IT & Business Innovation, Emirates Islamic bank
The looming debate is whether Fintechs will replace banks or will banks invest and takeover them. Though exceptions have emerged on both sides of the spectrum, truth is somewhere in between. Far from a “winner takes it all” scenario, future of the financial ecosystem will see Fintechs and banks retain their competitive advantages by acknowledging the value in harmonious coexistence. To understand where this convergence is likely to take place, it is imperative to understand their respective strengths and weaknesses. Both have something the other wants. Given that one’s strength is the other’s weakness, and vice-versa, it’s only natural that smart banks and ambitious Fintechs look to leverage each other’s competitive advantage to preserve their value within the chain.
Personally, I believe there are distinct areas in which Fintechs and banks need to clearly establish their collaborative intent.
1. Ability to be Agile vs Understanding of Regulations
Banks: Most banks are currently in the midst of a digital transformation (or at least thinking about it), looking for ways to speed their time to market and to deliver new value to customers. However, for most banks, their existing processes do not naturally extend to being agile and rapid. In this case, Fintechs are favorably looked upon to learn from and are being brought in to help banks adapt and deliver quicker working pilots to challenge the norms.
Fintechs: For Fintechs, nothing is impossible, as they rapidly adopt new ways of design and delivery. They pilot fast to learn from customer feedback, iterate and improve the product instantly, almost overnight. However, their speed gets hampered by ignorance of banking regulations. As soon as the Fintech invention is tested in a bank’s setting, regulatory requirements become the hindrance.
For Fintechs, nothing is impossible, as they rapidly adopt new ways of design and delivery
Fintechs can benefit immensely if this know-how and guidance is shared with them beforehand. They need banking coaching to comprehend and position their solutions so that their advantage of speed thrives.
2. Capability to Scale vs Not scared to Fail
Banks: Traditionally, banks have been able to defend the customer interface by controlling the entire value chain. However, as the value chain becomes unbundled and the technology changes at an exponential pace, this strategy becomes too costly and unsustainable. Banks do enjoy the scalability of customers who are captive, to try out new functionalities, and revert back with feedback. Banks are well positioned to take an innovation to mainstream, either on its own, or smartly bundled into its existing packages. Fintechs need and value these most.
Fintechs: They love to try out new things and quickly adjust and innovate even more. What Fintechs face is a genuine lack of audience (at a bank’s scale), who will be willing to experiment with their products and offerings, providing candid feedback on the same. Fintechs strive on feedback as they are intuitively fearless and proven risk takers. They realize that a failure is just another step towards success. They are willing to experiment, fail fast to enable another quick iteration to be tested again. Banks can benefit from this mindset and learn to courageously explore this new way of working. For Banks, this trait is one of the most compelling cultural shifts. Fintechs can help make this transition possible.
3. Customer Experience vs Trust
Banks: Most customers perceive banks as being burdened by legacy technology and focused on complying with regulations rather than meeting the radically changing needs via digitization. The need for banking, by and large remains the same, but a new way of banking is demanded by the evolved tech-savvy consumers. Banking interactions can seize to be boring, mundane and archaic. These can be lot more intuitive, simple and effective. Fintechs start with the customer experience in mind. In order to challenge the age old way, they bend over backwards in creating intuitive experiences. Fintechs can truly help banks in breaking this barrier of “held back thinking”. They naturally come and challenge the status quo by saying “why not” instead of Banks who are often found saying “how could we”. Focusing on the why brings about the how, not the other way round.
Fintechs: Being customer centric, technology driven and with freedom from existing limitations helps Fintechs innovate. Use of the most modern technology to build user friendly interfaces is arguably their core strength. Because they do not own the underlying infrastructure, their mission is to make the user experience better rather than to protect existing services which rely on legacy infrastructure. They see data as an asset thereby extracting valuable customer insight from big data to offer a better timely service. What they lack is the trust of consumers. Compared to banks, Fintechs are small, unregulated companies with uncertain future composition. With banks on their side, this barrier can be overcome.
To sum it up, a successful strategy for banks lies in greater collaboration with Fintechs rather than competition. By taking bold decisions now, banks stand to reap benefits in the future in terms of retaining their clients and growing their profitability through use of technology.
An urgent change in the mind-set is needed which sees digitization as an opportunity rather than a threat. Equally, Fintechs need to understand that, to be viable they cannot disrupt the entire value chain of banks which is a result of a thorough understanding of the financial system and a deep integration within it. For Banks and Fintechs the opportunity cost of not collaborating will likely be the difference between survival and success.