Moving the Immovable: The Fintech-Led Disruption in the Financial Sector
7 min read

This decade saw technological integration in the financial sector at a blinding rate. The almost-overnight rise of fintechs (financial services which are supported or enabled through technology) has disrupted legacy banking in a way that was previously unthought of. Their success has led the banking sector to rethink their strategies not only to acquire customers but also to gain a competitive advantage in a fast-growing market.

 

One swipe on the screen and just a few taps later, most of us can now finish any financial transaction – small or big, with individuals or institutions – and don’t forget, all of this takes barely 5 minutes of our time. The smartphone revolution empowered every individual to be the master of his/her finances, and with the power of any and every sort of application readily available for everyone, consumer transactions have become faster, smarter, and more streamlined. Digital transformation has spectacularly disrupted the traditional banking industry with its reinvention of customer service.

In the last decade, fintechs with more agility (compared to incumbent banks) have been able to bring in innovative products that have attracted tech-savvy millennials. Having been operational for comparatively longer than fintechs, incumbent banks have the advantage of a large customer base. On the other hand, fintechs score over these banks in providing smart financial solutions and innovative products, catering to the changing customer preferences, and being inclusive towards a larger customer base, like the emerging markets.

 

According to the Capgemini World Retail Banking Report (WRBR 2019), “Banks are struggling to deliver a delightful last-mile experience to customers as non-traditional firms swoop in.”

 

Fintechs have been gaining ground in both customer acquisitions and customer satisfaction. Disruption is inevitable because of the transformation, which is the end-result of the process, almost always works in favor of the customer. And when the consumers – individuals or businesses – decide where their allegiance should lie, legacy banks must not find themselves lacking. Instead of bracing themselves for the change, they must adapt to it to hold their ground.

A Change in POV: Towards a Customer-Centric Approach

The financial landscape has experienced an upheaval with the introduction of fintech. With it, the services they offer and the ease with which they offer them, have initiated a change in approach towards customer experience. Customer empowerment is attained by providing easy and round-the-clock access to services, quick conflict resolution, and user-friendly platforms. Legacy banks, which still rely heavily on their physical branches for customer interaction, must focus on omnichannel customer satisfaction by integrating channel diversification.

A 2016 PWC report revealed that in a survey conducted among fintech firms and traditional banks, only 53% of traditional banks said they have a customer-centric approach, while compared to the commendable 80% of fintech firms. Therein lies the problem. The digital revolution has empowered customers to demand services suitable for them and if they are unavailable with one specific bank, then they are free to pursue these services anywhere else.

Almost every traditional financial service provider has a mobile interface for its clients because the need for them is urgent. This is where fintech firms have always had an advantage. Most fintech firms are startup digital banks with no physical branches. They offer a subset of full-service bank offerings and better customer experience at a fraction of the current costs. Digital banks like Atom in the UK and N26 in Germany fall in this category.

 

The WRBR 2019 shows that the top reasons for customers preferring products from non-traditional firms include a) Lower Costs (70%) b) Ease of Use (68%) and c) Faster Service (54%)

 

On-boarding processes are much simpler for most fintech firms compared to traditional banks. Google Pay and Apple Pay offer the simplest of processes for clients to hop on board. Legacy banks, on the other hand, still have complicated processes in comparison. Personalizing customer experience must be a priority for legacy banks to stay in the competition.

Bridge The Gap With Open Arms

Investopedia defines open banking as “a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs).” This method allows the networking of accounts and data across institutions and third-party service providers.

However, customer resistance to sharing data, worries over data security, lack of industry-wide standards, and legacy system constraints mean that banks are hesitant to make the shift.

Despite some legacy banks making the shift to open banking, the results have not been inspiring with only 1 in 5 banking executives acknowledging that it achieved the desired results.

Although Open Banking is yet to reach maturity, the World FinTech Report (WFTR) 2019, indicates that the financial services industry is entering a new phase of innovation - popularly known as Open X. This is a welcome boon for the struggling legacy banking industry as it will accelerate collaboration across financial institutions, thus helping serve an integrated marketplace.

This jump into the Open X framework will be facilitated by a more structured collaboration, API standardization, and shared customer data insights. Leapfrogging into the Open X architecture as early as possible will ensure that incumbents don’t lose out on any more customers.

  

The financial services industry is undergoing a shift from Product to Experience, from Ownership to Shared Access, from Assets to Data and from Building/Buying to Partnering.

 

Smart Solutions: Make an Offer They Can’t Resist

New fintech startups have a streamlined solution to a niche problem. By targeting the problems left unaddressed by traditional banks, they are able to acquire a whole new customer base. While incumbents still hold credit scores sacred, there are fintech firms now, that offer loans to clients with unimpressive credit scores.

The emergence of peer-to-peer marketplaces for lending has also empowered consumers to acquire funding from non-traditional sources, thus reducing the dependency on incumbents. Upstart, conceived and set up by ex-Googlers, is a popular P2P lending marketplace popular among the younger age group (20s–30s), whose mantra is “You are more than your credit score.”

Some fintech firms target incumbent banks as their customers. They are now creating new value propositions by using technologies like advanced analytics, AI, and Blockchain. The Financial Categorization API from Salt Edge interprets banking transactions. Some insurance companies use Tractable to capture photos of accidents and with the help of AI, receive a likely estimate of the damage.

Fintech firms have the magic of secure and user-friendly mobile apps, much like the mobility solutions provided by Nagarro. Product innovation is at the heart of disruption in the fintech industry, and incumbent banks must shake off their legacy issues to be part of it.

Collaborate: Take the Road Less Traveled

If you can’t beat ‘em, join ‘em. The financial ecosystem can be strengthened by direct collaboration between traditional banks and fintech firms. Strategically carved out win-win partnerships between the two will also mark a win for consumers. Superior services combined with the certainty of regulatory oversight will make for highly effective and efficient financial services. Not to forget, there are also the added advantages of reduced cost and shared technologies for both types of institutions.

Fintech firms have largely been responsible for altering customer expectations towards the higher end, as technological advancement has been instrumental in educating the consumers. They know exactly what they want, and whoever harnesses the power of this customer insight will lead the race. Providing niche services and offering smart solutions have thus far been fintech’s forte, but traditional banks can no longer afford to be behind.

A 2018 McKinsey article says that the trend of financial institutions collaborating with fintech startups as investors and partners is on the rise. More than 80% of those surveyed confirmed that they have entered into one kind of partnership or the other.

Meet the Rising Tide of Change

Once – what seems like a long time ago – the more number of branches a bank had, the mightier it was. The rapid growth of technology has changed all that. Now, reach is no longer measured by the number of branches but by the number of your loyal consumers. And in the era of constant disruption, loyalty is a fickle thing.

Disruption – across industries and sectors – forces one’s hand to rethink, innovate, and pivot.

 

Legacy banks, if they don’t disrupt their business model, will be left on the sidelines of this massive upheaval.

 

Banks might be facing many challenges, but they must invest in taking bold steps to close the widening chasm between emerging players like fintech firms and established ones like themselves.

A little flexibility here, and a little openness there - is all that is needed to gain the much-coveted advantage that can open the market to endless possibilities.