Banks are investing huge sums in replacing legacy systems, working to upgrade capabilities so that customers can now do online what they once could only do in branch. There’s no question that the ability to apply for a loan or open an account while sitting at your computer is a necessary and valued change.
The problem is that by digitizing existing services, banks are simply doing what their customers expect of them: moving a service to a different channel. One might almost describe the process as a hygiene factor, despite the reality of it being remarkably time-consuming and expensive for banks to achieve.
In truth, these developments are not as innovative as customers now require. Gartner has called this out recently in their webinar on Managing Innovation and Digital Transformation in Financial Services, 7 July 2015. They’ve pointed out that while banks are busy digitizing services, they should in fact be digitizing the whole business.
But how well placed are banks to do this on their own?
Clearly such a programme would be extraordinarily expensive. Regardless, in the time it would take a bank to realize this ambition the Fintech sector would almost certainly be more than a step ahead.
IDC Insights has reported that US retail banks will spend $16.6 billion on digital transformation initiatives in 2015. Now compare that with the $12.2 billion spent globally on Fintech ventures in 2014, reported by Accenture. That figure has tripled in just one year, from $4.03 billion in 2013.
Unburdened by legacy systems, culturally more nimble and experimental, Fintech businesses are already innovative disruptors in this space.
A future built on a partnership model
Banks must stay relevant and meet customers’ ever-evolving needs. In my view, their best way of doing so is through a partnership model, creating a capability that allows them to deliver rapidly and respond quickly to customer demands.
And indeed there is a growing list of banks doing just that. For example, in the UK Santander has partnered with peer-to-peer lender Funding Circle. The bank refers SMBs with rejected business loan applications to them. And in return Funding Circle sends those SMBs needing banking services to Santander.
This move is indicative of a general acknowledgement that it makes little sense for a bank to build systems and software from scratch when Fintechs have already done a lot of the hard work for them. The challenge comes when they want to assess and integrate multiple partners. That’s where the BCSG platform and our experience in managing partners comes in.
As banks explore numerous options, including collaboration and acquisition, one thing is clear, that in the past few years they have recognized the need for change. The next step is to embrace the disruptors who’ve brought innovation to the sector, and find the right partnership model in which to do so.
For more on digital banking solutions for small businesses and our insights on small business fintech, visit the financial institutions section on our resources page