September 12, 2017

Banks Handle Pressures from Innovators (article)

We are living in a time of disruptive innovation across many industries. In the wake of the global financial crisis, financial institutions have had to contend with a rapidly changing landscape of operational risk and regulatory challenges as well as competition from nontraditional market players. Technology is having a transformational impact on how business is conducted. This is especially true of banks and financial institutions. Financial technology, or fintech, is radically changing all aspects of the financial services sector. 

While the question of fintech regulation is not yet settled (particularly following the Equifax hack), clearly there is no looking back now. Banks must respond to customer demands if they are to remain relevant and profitable or they will risk possible disintermediation and replacement.

Bank Customers Have Expectations

Rapid changes in technology also affect bank customers. “As agile tech companies raise the standards of customer experience, people won’t hesitate to use services better tailored to their needs,” says Paul Bowen, banking lead for Avanade Europe, a business technology solutions and managed services provider. But only 11 percent of executives who responded to the PwC Retail Banking 2020 Survey said they were “very prepared” to address innovation in the banking industry, though 46 percent recognize it as “very important” for their institutions.

Consumers may not stick around long enough to wait for a bank to innovate. A survey conducted by Kasasa Explores in 2016 found that one in three Millennials (the largest generation in the U.S.) would be open to switching banks in the next 90 days if another bank offered better rewards and technology. “Commercial clients are increasingly expecting innovative technology capabilities from their bank,” says Matt Miller, head of product innovation for Cleveland-based Key Bank’s commercial and enterprise payments division, in a recent article on American Banker. They are demanding technology that's as good as what they use in their personal lives.

From Competitor to Partner

Banks that understand their niche in the market and their unique value position are able to drive more value by seeking out partnerships versus the alternative – the resource-heavy process of developing new technologies in-house. Building on this rationale, to accommodate customer demand banks have begun partnering with fintechs, shifting the cost and burdens of innovation to the fintech companies from whom banks can purchase and private label those solutions to offer their customers. For many banks this is becoming a preferred method for providing both personal banking and business-to-business (B-to-B) functions their commercial customers value. 

Another way banks are tapping into the fintech market is through mergers and acquisitions. Key Bank has taken the acquisition route. It secured an equity stake in the fintech firm Billtrust, which provides digitized and automated accounts receivable capabilities for companies. Billtrust will power the Key Bank’s new KeyTotal AR service, which is designed to give corporate clients improved operational efficiency and cloud-based digital invoicing and payments capability. More banks may be considering fintech targets as more traditional targets for bank acquisitions become limited and fintechs look to expand their operations.

The trend is not confined to the U.S. United Kingdom business funding firm Ezbob aimed to disrupt lending by providing loans to small and medium-sized enterprises through its platform that greatly streamlined the lengthy loan approval processes of traditional institutions. Last year it white labeled the platform to banks. Royal Bank of Scotland is among its latest users.

Clearly fintechs see the advantages to this relationship. The bank technology provider FIS and the credit bureau Equifax are jointly launching an authentication platform called OnlyID for banks and retail. Consumers could have one set of credentials — a combination of biometrics, behavior analytics and identity information — with which to identify themselves wherever they shop or bank online. The idea is for consumers and financial institutions to be able to gain greater confidence around the validity of the consumer’s identity, as well as help reduce fraud and identity theft while improving convenience.

Authorization could present another way in which banks stay vital to the financial supply chain even in the face of the fintech explosion. Banks could become part of the consumer authorization process on the front end by letting its apps and websites integrate with the OnlyID authentication app. Or it could completely embed OnlyID in its mobile banking app, replacing its existing login mechanism. As the supply chain evolves it will be essential that banks evolve and determine how they can work with third parties, similar to how they evolved in the 1970s when credit card processors became part of the financial transaction process.

Fintech as Bank Tech Vendors – Makes Sense Beyond the Dollars

There is logic and cost savings for smaller banks to purchase fintech capabilities rather than staff up and build out an entire unit to support customer tech demands. But there is wisdom in this approach beyond the dollars. The threats and risks of cybersecurity and data security are constantly changing. A major data security breach can be devastating for any bank but can easily destroy smaller banks that are also likely more vulnerable. Banks who understand themselves, who focus on their niche and marketplace while continuing to partner with technology can help ensure they remain successful even as competition among financial services providers increases.

Banks face many options for partnerships within fintech, which is in and of itself a diverse population. Large fintechs can offer platforms as a service, with an entire suite of services for banks. Small or start-up fintechs can also thrive by focusing on limited or specific solutions that are compatible with existing platforms. Irrespective of their size, these tech firms have the acumen, experience, training and incentive to manage the coming industry standardization and regulatory efforts and, importantly, to manage data security and other cyber threats inherent in the financial sector. Larger banks with bigger budgets and larger exposures may retain some or more of the fintech capabilities in-house, but regional and community banks will want to rely on fintech providers more and more in the future.

New Leadership Requirements for Banks

Beyond developing a technology game plan that delivers value to the bottom line, banks must consider new and different qualities when choosing leadership – technical, industry and cultural awareness – to usher their organization into the future.

Community bank leadership has traditionally come from a commercial line of business. Future leaders work their way up through the lending, credit and risk departments before taking an executive position. In this digital age banks are looking for leaders who are not only knowledgeable about the traditional lines of banking but who also understand and embrace banking’s future in financial technology.

New technology no longer simply affects the processing of transactions; it impacts the entire enterprise – the bank’s products and services, risk and vendor management, and, increasingly, legal and compliance functions. Behind the scenes, big data is leveraged to enhance consumer experience and streamline operations as artificial intelligence and machine learning begin playing larger roles.

That’s not to say new leadership at the banks must come from a technology background, but they must understand the fintech solutions and how they create value for the bank and its customers. The ideal candidate should be willing to work outside the bank’s four walls, if necessary, to partner with companies and vendors who can deliver new solutions. He or she must understand the need for and be equipped to convey the value of taking measured risks when considering these changes.

The Ecosystem Is Developing

Banks have found it hard to win back customer trust since the 2008 financial crisis. That financial meltdown is in part the reason for fintech’s growth and grab of market share. “As banks got stuck firefighting the crisis and dealing with regulation, tech was able to focus on innovation and launch products and services that became integral to people’s lives,” notes Nikolai Kuznetzov, contributor to Forbes Magazine. As the dust has settled banks have begun to take stock of how the financial sector has changed because of fintech and are beginning to develop new game plans for survival. “Rather than compete,” says Kuznetzov, “both banks and fintech ventures should acknowledge that finance is a complex ecosystem.” It seems that is exactly the direction being taken in the industry today.

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