Ryan Conway, SVP, Head of Business Development & Strategic Partnerships at Oxygen, a digital banking platform, talks about the promise of digitization in banking, which is not new, but is finally nearing an inflection point. In order to capture this moment, he says, traditional and newer fintech companies must play to their strengths and collaborate.
Consumers expectations are quickly changing and the banking industry is in a digital arms race to try and keep up. What’s more, the lines between traditional financial services companies and FinTechs are blurring everyday. Leading technology brands such as Facebook, Apple, Amazon, and Google have raised the bar for digital experiences and, as a result, enjoy a stronger emotional connection with their customers.
For an industry widely mocked for last unveiling a major technological innovation over 50 years ago with the ATM, there is hope. Sometimes innovation moves really slowly and then all of a sudden, everything changes. We are witnessing this today in banking.
To better understand the implications, let us take a deeper look at what is driving this change, from technology to regulation, and preview the new paradigms and business models we can expect to see in the not too distant future.
1. The Shift to Digital
Almost three-quarters of Americans (73%) access their bank accounts most often via online and mobile channels, according to a study from ABA/Morning ConsultOpens a new window , a figure almost 90% for those 18-44. This follows a broader consumer shift towards mobile technology and, along with a changing regulatory landscape, has created a new type of digital-only financial institution. Often called neobanks or challenger banks, these fairly recent entrants are capturing real market share and redefining the future of banking globally.
This is not particularly welcome news for incumbents, who are weighed down with the burden of physical branches and legacy technology. While global banks have been pouring money into IT — to the tune of $1 trillion over the three years (2017-2019) according to an Accenture Plc study — more than half of that is just maintaining their current systems and integrations. While the over $50bn of global FinTech investment in 2019Opens a new window seems small in comparison, these new players don’t have the overwhelming tech debt of incumbents and can thus allocate resources more efficiently, and because they don’t require the same physical footprint they can scale to new geographies much more quickly.
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2. Open Banking and APIs
Open banking is perhaps the primary factor reshaping the banking industry today. The practice allows third-party financial service providers open access to consumer banking, transaction, and other financial data, importantly with consumer consent, through the use of application programming interfaces (APIs). Allowing consumers to securely share their financial data with other financial institutions stands in stark contrast to the centralized manner in which banks have traditionally operated, and certainly removes a good deal of the stickiness banks have traditionally enjoyed. While not unilaterally welcomed by the banking sector, it is a game-changer, as it allows both traditional and new entrants to gain a better understanding of the financial picture of their customers, enabling them to offer better financial products with lower risk and democratizing access to financial services in the process.
Well capitalized incumbents have taken notice, and are spending big money to ensure they are part of this future transforming financial services. Just this year, two of the biggest FinTech acquisitions focused on this space: Visa’s $5.3bn purchase of Plaid, and more recently, Mastercard’s nearly $1bn acquisition of Finicity. Both FinTechs had established themselves as leading providers of real-time access to financial data and insights.
By enabling banks to access a more holistic financial picture from disparate sources, both banks as well as consumers can make better decisions and open up more services to more groups, regardless of personal net worth or size. It is this promise of a more inclusive banking system why regulators and governments globally are leaning into a more open banking infrastructure.
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3. AI & Machine Learning
Artificial intelligence (AI) and machine learning, a subset of AI, are at the forefront of innovation set to revolutionize financial services. The implications of the technology are many, but we are still in early days. Definitions differ, but at its core AI is a collection of technologies that allows for simulation of human intelligence in machines and, enabled by adaptive predictive power, exhibits some extent of autonomous learning. In practice, AI can be applied across a number of use cases within a bank, including:
- Credit decisions
- Risk modeling/ assessment
- Fraud detection
- Automation
- Customer segmentation
All of this points to reduced costs and streamlined operations, and perhaps more importantly, the ability to deliver more personalized experiences. By giving customers more control over their finances, banks can better customize financial products and services, give tailored financial advice, and provide the best digital payment experiences. The early winners will enjoy a significant competitive advantage for years to come, a key reason why so much importance and investment is being placed on this technology.
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Towards a Collaborative Future
While it may appear that traditional players are in a tenuous position with regards to the broader technological and regulatory shifts, the reality is there is room for both traditional players and emerging FinTechs. While it is becoming easier and easier for non-traditional players to deploy financial services via Banking as a Service (BaaS) solutions, it is still a highly regulated and capital intensive industry, and it is near impossible for any organization, of any size, to “fly solo.†Consider what it takes to launch a new startup “bank†that offers a standard checking account and debit card:
◠First and foremost you must comply with regulation. In the US, this is normally done via a sponsoring bank partner (rather than applying for their own charter, a much slower and risky endeavor). This regulated bank then “lends†the new bank its license in exchange for a revenue share.
â— The startup then needs to actually build the product, which includes partnering with a number of third party players including a payment processor/ program manager, a payment network partner (like Visa or Mastercard), a card manufacturer, a third-party aggregator to help them access other bank account data (open banking), compliance vendors enabling the digital KYC/ AML onboarding, et al.
In all, a new startup bank will need to partner with an ecosystem of dozens of players if not more to build out the entire stack. And FinTech’s are certainly not alone in the value they can derive from partnerships. Large firms can enable newer technologies that allow them to be more nimble and by drawing on solution providers to enable better integrations, thereby increasing the number and types of FinTechs they can work with. When done well, there should be greater agility, backward compatibility, removal of friction, and synergies for all parties.
While it can be said that banking technology is currently undergoing a Renaissance moment, by understanding the regulatory landscape and the technologies that are helping shape this change, both incumbents and new entrants can work alongside each other to help create value for their existing end customers and unlock new markets. Change is constant, and traditional players who cling to historic moats – scale, switching costs, outdated distribution channels and centralization, will find themselves eliminated in the not too distant future. Those who embrace change and adapt their strategies accordingly, understand that the future of banking is in empowering consumers and more inclusive, not the zero-sum game we’ve been playing all these years.
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