The way banks serve their customers is changing. In retail and now increasingly in commercial banking, expectations have been raised by digital and mobile user experiences, seemingly borderless transactions and real-time payments.
Customers increasingly expect these experiences across the financial services sector, but provision is far from universal. Larger banks have been quick to respond but smaller institutions are left wondering if this level of innovation and progress is ‘for them’.
The answer, of course, is that even smaller banks should jump on the innovation bandwagon. The choice is binary – innovate or die. But the news that global institutions have seemingly bottomless pockets is unhelpful.
Take HSBC, for example. The bank earmarked around $17bn in 2018 to invest in new technology to improve its growth prospects. JP Morgan reportedly allocated $10.8bn and Citigroup around $8bn. When your budgets are a fraction of this, going toe to toe with global competitors can seem futile.
But while the bigger players are following a well-trodden path – discover a new challenge or opportunity, invest heavily and at scale to meet it – this isn’t necessarily how the modern digital world works anymore.
- The component economy – why build when you can borrow?
- Move or improve – where to invest to maintain market share
Innovations in modular technologies and cloud hosting mean the landscape is much more democratic. There is also the need to be much more agile. We are by no means at the end of any phase of transformation and there is still a great deal of unknown future ahead. If anything, those making investments in large, dedicated systems risk limiting themselves in the future as technology continues to evolve and they have less flexibility to change.
So, what options are open to smaller banks and financial institutions who have no choice but to compete?
Fintech is often viewed as a challenger, rather than a partner to established banking brands. This is clearly not helped by terminology, which frequently sees this new group styled as ‘Challenger banks’. While a handful of start-ups do look set to make significant competitive inroads into the retail banking sector, most fintechs are primarily aimed at being point solutions to a single banking challenge or are set up as a white label solution to be used in partnership with existing financial brands.
Partnerships are valuable for a number of reasons. Firstly, from an expertise perspective. Established banks are well-versed in the needs of their clients and financial instruments, but have less experience in technical development, mobile technology or back-end integrations. This is bread and butter to fintechs.
Moving out of core services can be another challenge. While their knowledge of loans and payments processing may be encyclopedic, their ability to advise on self-service investing or international micro-payments may not be as comprehensive.
Making use of fintechs’ technical expertise as digitally-native, agile innovators, is just one advantage. With most, like Currencycloud, offering API integration and cloud-based services, scaling those services up and down is a low cost, low commitment approach compared to having to in-house every new offering. Speed is also of the essence, with many integrations taking a matter of days rather than the months or even years that traditional implementations can take.
Where smaller, regional banks may once have found themselves at an impasse when faced with a rapid uptick in competitor capability, agile partnerships with fintechs can put them on an equal footing. It is true, this is a challenging time. There is no plan B, where the option ‘do nothing’ exists. But, partnering with fintechs has a clear advantage. No matter how big or small you are, everyone can be a challenger now.