The financial world has not been this jittery since the 2008 crisis. This time the culprit is not the misdoings of big institutions, but rather the limits of those institutions. The world is buzzing about fintech and the impending disruption in the banking industry. Smarter technology companies are attempting to give customers quality service and an experience that’s relevant to the world in which they live, and big banks are being left behind.
Assertions are being made about “a once in a lifetime opportunity.” Possible? Yes. We are standing at the beginning of an exponential curve where the speed of innovation might surprise all of us – an unprecedented financial transformation.
But it will be possible only when the financial ecosystem evolves so that all the stakeholders and alliance partners – be they banks, fintech firms or regulators – align to work in the interest of consumers.
Here are the changes that have to happen:
- Banks have to embrace the changes new technologies bring to the table. They must be open to experiment, leave ego behind and pave the way for collaboration and innovation. The ecosystem is clearly developing in a way that makes co-investing, nurturing, funding and acquisitions acceptable strategies. Banks are taking either small steps or big leaps based on their business appetite and the pressure they feel from customers and their competition.
- Fintech will have to stay focused on the customer and on digital innovation. This means not being distracted by bad money in the system and creating an unwanted situation, like the recent stumbles of Lending Club that gave regulators reason to fret about yet another unknown in the financial system. While algorithms may look like a simple and savvy way of managing money, they’ve been known to show cracks, allowing hackers to tamper with the hard earned savings of consumers.
- Regulators will play a vital role in this entire ecosystem, not only by providing enough freedom for innovation to take place, but also by participating in this journey as key stakeholders. Their participation will enable the alliance between banks and fintech. Yes, there will be moments of nervousness; there will be vested interests, but for the larger good of innovation and customer experience, regulators will need to continue to support this disruption in an effective way.
Data is a stumbling block to banking innovation.
Banks are feeling the pressure on both revenue and margin. The magnitude of impact is not yet threatening, but things may change quickly with technologies like distributed ledger (also known as blockchain) on the visible horizon. To be ready for this alliance, banks will have to address the elephant in the room – data. An ocean of unorganized, unplanned, and in many cases unwanted data keeps these large banks pretty much immobile and unattractive for innovation. For any alliance between banks and Fintech to work, banks will have to first accept this problem openly and address it in a systematic and holistic way – not just with patchwork.
While Fintech will bring its digital bells and whistles to the business models, it will not serve any purpose if the back-end remains sluggish and lethargic. Regulations have constrained banks in the last several years and kept them from sustaining focus on core legacy technology issues.
For this alliance to shape up, banks will have to take a step back and bring new solutions to their core processes: simplification led by optimized business and information architectures, automation of the boring and repetitive work, and by applying cognitive intelligence in a selective way to achieve a nimble back-end. If banks don’t do it themselves, fintech firms will force them to change to stay attractive for any kind of partnership. Service providers and system integrators will have a large role to play here. Banks will need trusted partners to clean up the mess and help them achieve digital fitness.
Yet fintech can’t go at it alone.
Still, fintech firms risk becoming part of a bubble if the lure of becoming a financial service provider looks too tempting. Ideally, fintech will enable digitalized financial services rather than attempting to compete directly with the banks. Harmonized collaboration between banks and fintech will bring the best of both worlds together: the agility and experience of digital technologies with the scale and security of large banks.
The coming years will be the formative period of this alliance.
While predictions that fintech will disintermediate banks are unfounded, fintech will need to mature via rigorous structure and regulation in order to earn widespread acceptance. When all is said and done, the customer will only accept the bells and whistles of fintech to the point where money is not at risk. While a Wealthfront or a Betterment will provide algorithmic money planning, when things go wrong customers will need someone looking over their shoulder. Banks are not going away, but those that don’t change will die.
Mohit Sinha is a Director with Wipro Digital.