Banking 3.0: can financial institutions digitise to stave off the fintech threat?
The term “digital transformation” may sound like the latest enterprise tech hype phrase thrown around.
The term “digital transformation” may sound like the latest enterprise tech hype phrase thrown around boardrooms in an attempt to create the perception that an organisation is committed to technological change. Unfortunately, across many industries, this has been the case for too long.
In world of financial services, change could soon be afoot, as c-level execs across financial institutions face an onslaught on their most profitable business lines from the rising fintech disrupters. Forget the large-scale, low-margin world of retail banking, fintech firms are on a mission to take away a large slice of the most lucrative areas of banking – including wealth advisory, remittances, payments and cash management. Despite this genuine threat to profitability from the fintech community, financial institutions appear to be struggling to see digital transformation as something the whole business needs to buy into. According to a recent report from Avoka, looking at the state of digital transformation in banking, the majority of banks still fail to capitalise on their investments across digital channels, with complete abandonment or substantial dilution of delivered value being the case with 70%‑90% of the programs.
The problem here is not the lack of investment, as regulatory compliance and risk are the only functions within a bank to receive more funding than digital. The issue is more a structural one, as the majority of financial institutions continue to view digitisation in a siloed fashion, as opposed to something that should deliver end to end transformation. As a case in point, most institutions now have a Chief Digital Officer (CDO) with a team of 40 to 50 people. However, this team is often left to run proof of concepts in insolation of the business on one side and CIOs technology team on the other. On top of this, a fintech vendor by definition, carries out its day-to-day business in a very agile way unlike a financial institution which is rooted in legacy technology infrastructure that has been in place for ages. Therefore, any shift to an end-to-end digital approach will not happen overnight. A bank could take anything between three to five years to get right.
Despite these structural headaches and relentless competition, financial institutions are still well positioned to take advantage of the digital revolution. Particularly, if they start harnessing something the fintech’s simply do not have access to – a vast volume of customer data. Access to this information should be seen as an opportunity to learn more about clients in order to drive new revenue streams. As different business lines come under pressure to deliver bigger returns and keep costs down, any data that delivers new insights about client behaviour could become competitive advantage. As an example, rich insight can be derived from the plethora of credit card spend data banks now hold.
Having said that, unless financial institutions find a way to harness this data across the organisation, they will continue to struggle. Basic issues like the quality of data, ability to consolidate data across platforms and business lines to get a unified view (of the customer or a product) and overall discipline and governance around data needs to be addressed before meaningful insights can be derived.
In the meanwhile, banks are starting to look to the outside world to enhance their digital expertise. Many banks are already leaning on external change management expertise to deliver more agile and leaner approaches to operations and tapping into partners with proven experience in delivering digital transformation projects. Many others have taken a slightly different approach of providing a sandbox (controlled environment) to start-up fintechs, hoping to help them prove the idea and then scale up. All the approaches have seen mixed results, but have helped the banks understand and appreciate the value of fintechs better.
While all this points to progress, financial institutions still have a long way to go before digital becomes fully embedded across the business. One thing is for sure, as competition continues to intensify, only the banks that start monetising vast amount of data and selectively partnering with fintechs will be the ones to thrive in the face of continued onslaught on margins and profitability. Probably, the right way to look at the landscape is not in terms of ‘banks v/s fintechs’, but a more collaborative ‘banks plus fintech’ model, eventually leading to improvement in service quality and reduced costs for the consumer.