Ironing out banking inefficiencies through increased digitisation

How can these two forces combine to push the finance revolution even further in 2015?

Historically, banks have been responsible for most innovations in the finance spaces, such as credit cards, which revolutionised the way we pay in the 1950s and ATMs, which were introduced in the 1970s. Yet, while these developments came decades apart, modern technology including smart phones, big data, social media and cloud computing has allowed outside players to move in and dramatically speed up the rate of innovation.

How can these two forces combine to push the finance revolution even further in 2015?

Banks may have led the way with a number of core technology developments, but there are nonetheless a host of non-technical inefficiencies still present within banks: a number of banks still require applicants to bring in paper bank statements for loans and some transactions can only be carried out in branch. In addition, handling international payments at banks is still a confusing process. A payment made from a UK bank to Brazil for example, must pass through a number of correspondent banks in the process. Not only is this hugely inefficient, it is also expensive for customers – each bank charges a small fee for acting as a link in the chain.

Developed in a pre-internet era, banks’ business models and technology infrastructure – largely built around product sets and delivered through the branch – were not built to contend with today’s fast paced customers. As such, a host of FinTech players have taken the opportunity to develop innovative alternatives, built from flexible APIs that allow the company to continue developing and adapting to the changing environment. PayPal is one of the first notable examples of a technology firm recognising an inefficiency in current payments services, developing a profitable solution that benefited the customer, and in the process, taking away potential revenue from banks. Since then, the space has exploded into a buzz of FinTech companies, offering everything from investments to international payments, loans and bank accounts.

The success of these players is in part due to their ability to focus on a very niche segment of the industry. Traditionally customers looked to banks to serve all their financial needs, however the space has opened up to a host of technology alternatives concentrating on delivering a great service within a targeted area. Banks would be wise to take note of this tactic. By focusing on the services they are good at – such as deposit taking, capital markets and back office operations – rather than trying to dominate universal financial services, banks could be more efficient and provide a smoother, more flexible service to their customers.

Nonetheless, banks shouldn’t be losing sleep over how they can compete with these new players. In fact both FinTech players and banks have a lot to gain from working together. New finance companies can benefit from the sophisticated history of banking operations, while banks can simultaneously seek value in new players – whether that means looking to partner with them or acquire their intelligent technology offerings. Banks have started to see the value in investing in in FinTech innovators, which in turn enables new players to continue expanding their offer, broadening their network and increasing their technology budget.

Despite the huge success of a number of FinTech firms, banks are and will remain integral to the financial landscape, but they are being increasingly pushed to adjust their services in line with consumer demands for ‘always on’ technology and constant access to their finances. Rather than focusing on competing on technology, finance players should be looking for ways they can collaborate. By working together to make their processes as efficient as possible, financial services across the board will be able to concentrate on the areas that matter – namely offering a great service to customers.

2014 has been a landmark year for the FinTech industry – as alternative players have continued to prove their worth, investors and customers, who were traditionally apprehensive about the industry, have shown real faith in these successful newcomers. As we move into 2015, I’d like to see more banks following suit. Collaboration between banks and technology firms will ensure the finance industry continues to innovate at the fast pace to which we’ve all become accustomed.