Can Fintechs take banks to the edge of innovation?

Industry   |   
Published March 30, 2016   |   
Team Crayon Data

This post was written by a guest author

Banks. When was the last time you associated the words “innovation”, “forward thinking”, “futuristic” etc. with them? I would say “never!”
Banks are generally thought as being traditional and conservative. But the future isn’t any of these. It is fast, shiny and rocketing away at scary speeds, daring everyone to keep up with it or get left far behind.
What about the financial technology (or, to give them their snazzy portmanteau, ‘fintech’) companies? If banks are traditional and conservative, fintechs are anything but. Fintechs are the hip kids, spouting the latest lingo, armed with the coolest swag and holding on to the future with both hands.

Banks have long held to their staid and conservative image, mired as they are in their archaic rules and regulations. By their very nature, they are risk averse. But, with the recent financial collapse and the disruption created by the emergence of the financial technology firms, innovation in banks is the need of the hour, if they wish to stay relevant.
To many, it may seem like a no-brainer that banks must collaborate with fintech firms if they are to get ahead, to innovate and drive change. But what about the players? Can the two find common ground and work together? Or are they too different and may find it impossible to come together?
At the outset, it may seem like the two are coming from opposite extremes and collaboration between such parties is impossible. Not so, according to Rati Shetty, Chief Product Officer of Bank, India’s top financial technology startup.

“At the end of the day, the money for a customer – be it for a loan, credit card or insurance – is coming from the banks. So folks like us cannot exist without them, it is as simple as that!”, says Shetty.
Banks have existed for a lot longer than anyone can remember and at the end of the day, the fintech firms do guide their customers to the banks to fulfil their needs. So, unlike what some may perceive it, banks and financial technology companies are NOT competitors but just two differing facets of the same solution. If we place the customer on one side and the banks on the other, fintech firms actually fall in the middle. And as tech-driven middlemen, they have the potential to do this on a much larger scale than the traditional banks.
Why banks need to collaborate with fintech start-ups

If the buck stops with the bank, what is the incentive for them to collaborate with anyone else, much less an ‘upstart’ like a tech startup? After all, they have been in the game a lot longer than the word “fintech” has been! Why do banks need financial technology startups? What do they hope to gain by this association?

  • Firstly, the needs of the customer. For long, banks functioned in the same way as they have since inception – tellers seated behind sturdy cages, truncated working hours and even with the advent of net banking, severely antiquated banking software that leaves you frustrated at best. But with the advent of the “cool kids”, aka the fintech firms and their brand of customer experience, consumers are accustomed to getting more and so, are learning to expect more. MORE is now the order of the game and whoever doesn’t provide MORE, runs the serious risk of being left behind. Customers are calling the shots now and what they want are customer experiences tailored to suit their individual needs. This, while not the banks’, is definitely the fintech startups’ ballgame. They know how to play the game, because they invented it! They made it look cool!
    So, collaboration with fintech companies will help bring traditional banks up to speed and help them connect with their customers better and provide them with a superior class of service.
  • Secondly, the reach. As Rati Shetty wisely points out, banks are where the moneys at. Whichever way you look at it, all the fintech firms’ customers ultimately have to find their way to the banks for their monetary needs. Marketing and acquisition can be done for little to no extra cost, as these will be taken care of by the fintech firms. “By making use of alternate channels like the fintech startups, banks get access to a major source of high quality customers”, she says.
  • Thirdly, technology. This is where fintech startups stand head and shoulders above banks. By the very nature of their ecosystem, financial technology companies are brimming with the latest technology. Innovation is the name of their game, and they just do not rest – constantly updating and improving current systems is how they stay ahead. By linking their lot with the fintechs, banks can leverage cutting-edge technologies via the features and automaton that these startups will build.

But before banks can hold hands with fintech firms and walk off into the sunset, there are a few hurdles that need to be surmounted first. The cultural differences between the two, the differing responsibilities the two institutions have towards their stakeholders and the resultant expectations. As well as, the bringing together of two vastly different working methodologies into operating compatibility, are all valid concerns that need to be ironed out at the outset.

Banks have already proved that, steeped as they are in their traditional way of business, they can embrace innovation too.
CapitalOne set up innovation labs in three different locations in the US, each focusing on a different area to bring about products and services to their customers. As has MasterCard, since early 2010. Spain’s leading bank Caixabank has embraced the digital trend in a big way in connecting with its consumers in different ways.

These are all great omens. So, with the vast sums at their disposal, why can’t the bank go do it on their own? Why not cut out the middle men?
The answer to this question lies in a fundamental truth: nobody produces high value innovation like the small firms. According to the research conducted by Hicks & Hegde in 2005, small firms were more effective in producing high value innovation. By collaborating with a financial technologies firm, banks can maintain their focus on their primary job, i.e., the business of banking, and leave tech companies to play to their strengths, that of innovation and expansion.

The question is no longer should banks partner with fintech startups but how soon can they start and how quickly can they take it forward! Because the future that everyone is talking about, is right around corner. Only by merging these two diverse institutions, can we make giant strides forward.