Big Techs, Banks and Fintechs – Battling for Leadership in Financial Services
With the whole economy migrating towards digital services at an increasing pace, there is a lot of attention on the industry’s ability to adapt to the current situation. This is an unforeseen acceleration of changes that were just starting in recent years, and because of confinement measures across the planet, they are now becoming a necessity.
In sectors like banking, this violent shock comes coincides with new movements and regulations like IFRS9, PSD2 and Open Banking, which came about precisely to address the need for financial institutions and the business environment to adapt to the demands of a highly digitalised society.
As a result, the debate is becoming ever more interesting about who will take the lead in the industry. Will it be the traditional bank, new, more agile banking organisations, fintech start-ups or the group of businesses known as Big Techs? Or will it be some mixture of all of these?
“The world of banking is facing significant disruption as consumers demand increasingly sophisticated digital products”, writes Ellen Daniel, reporter at Verdict, a website specialising in business, technology and innovation. She writers that, in the present scenario, the Big Techs, also known as GAFA (Google, Amazon, Facebook, Apple), are looking to make “massive inroads” into banking.
In her report, Daniel quotes James Buckley, head of Finacle Europe, the banking division of Infosys, and an authority on the subject. In his opinion, “the big players that are sitting out there, sort of around the edge of financial services at the moment, I think will start moving in a much more systemic way”. It’s an enticing prospect for these businesses as it provides them the opportunity to play an even larger role in the lives of users, as well as unlock valuable insights from their spending habits.
The “GAFA” companies aren’t conventional banks, but they are waiting to make massive inroads using Open Banking APIs, and there are definitely opportunities if we look at the following consumer opinions:
– According to the lending specialists Pepper Money, 82% of UK consumers believe that “banks are not innovating fast enough”.
– Even more importantly, according to a survey of 18 to 35-year-olds by MuleSoft, half (52%) of those surveyed would consider using banking products from either Google, Amazon, Facebook or Apple.
On the flip side of the coin, a recent article at ITWeb entitled ‘Banks can become the next big tech looks at the complete opposite focus, claiming that “banks are already part of the big tech movement”. What’s most interesting about this article is not so much what it says but who is saying it. If it had appeared on a banking industry website and was written by someone from the sector, it could easily be simply a “corporate” response to pressure from Big Tech. But it actually appears on a technology website, and the article is written by Kumar Utpal, Regional Sales Manager for Banking and Insurance, IN2IT Technologies.
“Innovation means change, which explains why banking always seems to be in a state of turmoil”, claims Utpal. “In reality, that is the price one pays for being an early adopter. Banks are early adopters out of necessity. When bitcoin arrived, the banks didn’t hide. They held conferences, created development teams and became part of the conversation.”
“We don’t think about it today”, he adds, “but much of the connected world today exists because of the efforts of banks. Transferring money instantly, conducting safe online sales, and making customers feel safe in the digital world are all innovations spearheaded by the financial sector. Banks are continually investing in new technologies, to the point that today technology sits at their core”.
Despite this, Utpal writes that banks seem to be “lagging”, and this is mainly down to their complexity and the range of different services. To tackle this, he suggests three specific actions:
1 – Encourage a culture of experimentation and change through specific business units.
2 – Collaborate more with fintechs as a way of focusing on what our modern times require.
3 – Relax some of their procurement mechanisms for technology and new players: “An agile culture needs agile procurement”.
Is there any other option beyond the Big Techs and the big banks? In a recent article for Strategy+Business, Roman Laurence and Simon Westcott, managers at PwC UK, see the opportunity for new businesses and those traditional banks that know how to use them as a vehicle for transformation.
Both are absolutely clear that the greatest challenge for banking today comes from the GAFA companies and their huge capacity for introducing technology and new functionalities. “These rapid shifts”, they say, “may seem daunting to traditional banks and a challenge to the credit-approval processes that have emerged through decades of deliberate, methodical product design. The good news is that they need not face them alone. In many cases, the best approach will involve working with other providers”.
Such collaborative arrangements should focus on three key areas:
1- ID verification services, which “ideally” are recognised across multiple jurisdictions.
2 – Shared payment solutions to overcome their individual lack of scale.
3 – Balance-sheet and risk-management functions-as-a-service to fintechs, and then to all technology companies.
“Given the headwinds confronting the consumer banking sector, the type of deep transformation we are describing may sound daunting. But as risky as it may seem, a bigger risk emerges if banks choose to stay on their current course, which would mean surrendering their role in the digital economy — and their relevance”, they conclude.
None of this is anything new. It’s the classic “adapt or die” situation. All that’s left is to choose which one of the two paths to take, perhaps faster than originally planned, since there’s no strategy for dealing with the consequences of a global pandemic.