The “digital revolution” driven by the FinTech sends worldwide banking into turmoil over the question whether and how a bank’s profitability can be maintained in the future. We have assembled five reasons that show that banks can emerge as winners.
Five years ago, strategic heads in banking dismissed the FinTech world as a new playground for software companies that would be given no chance because of the heavy industry regulation.
Today, large financial institutions such as HSBC, Deutsche Bank, BBVA, Credit Agricole, American Express, Bank of America and many others have engaged FinTech as a key future market. A survey taken by Accenture shows companies are approaching the FinTech adoption through three different strategies: Open innovation, industry collaboration or direct investment in FinTech companies.
And the commitment is growing strong: In 2014 $12.21 billion dollars have been invested worldwide in FinTech businesses. According Goldman Sachs, the FinTech segment alone will generate annual worldwide sales of $479 billion and profits of $4.7 trillion. A dozen of the 4,000 Fintechs (AngelList) worldwide are already valued at over $1 billion.
“Peer-to-Peer” lending platforms such as lending Club, PayPal, Bitcoin or Robo-investment offers like Betterment which provides investment strategies to consumers that replicated the most successful money managers show where the journey is taking us.
Digital FinTech models allow cost savings. But they also create slim margins in all three business segments: lending, money transfer and investment business. Adding a heap of regulations caused by the financial crisis the financial service industry’s profitability is under fire.
Is the banks proactive strategy heralding the erosion of banks? We provide five theses according to which financial service providers may be faced with while tough reality, but also may profit from the opportunities provided by FinTech:
Thesis 1: Nothing works without bank account. Even in the FinTech world. It’s about the access, the services and to the key question “how much Fintech should it be and in which areas?”.
Thesis 2: Core competency customer: FinTech forces banks to focus on their core business, their clients. It will reveal how well banks really know their customers. To banks FinTech offers new and improved ways to better address certain customer groups. A strategic and cleverly placed portfolio of fin-tech niche products will help sharpen the bank’s business or even allow for re-invention of its operations.
Thesis 3: Specialization as decisive factor. The winners of the new dawn will be those banks that have a clear FinTech strategy and keep it consistently working! Standard business models that want to be everything to everyone won’t work anymore. Banks were very undecided with the way their strategies were going, with many changes back and forth without any significant success leaving an imprint on the customer.
Thesis 4: The perfect match! FinTech companies are primarily service providers. They do not strive to replace banks. Banks are not interested in generating FinTech expertise and it is not in their DNA. Their image has also nit been helpful to attract young and unconventional FinTech talents. Working with FinTechs does provide an easy and affordable access. FinTechs on their part, do not want engage in the world of administrative challenges banking regulations impose on the industry. They just rely on banks provide these skills.
Thesis 5: New profitability. Banks will redirect their business activities in a way that their customer business remains profitable at a controlled minimum risk. FinTech can provide a significant solution for this challenge by reducing losses triggered by emotional failure caused in crisis situations, impatience or subjective judgments. They will also allow for new revenue channels providing an unparalleled variety and depth of services.
The proclamation of the end of traditional banking as we know it today is premature statement. People need personal contact and advice. The human element can and will ultimately not replaced entirely by the technology we use. Nevertheless, it is the best time for banks to find out how and how much FinTech they require to position themselves for a bright future.
FinTech benefits may however prove to provide a key win-win situation for future oriented banks. The digital innovations already allow honing a bank’s uniqueness and client focus while generating a stronger performance record. After banks, who are able to adapt to and adopt the new will emerge as winners proving “Maker” qualities to market and its clients.