The Brutalising Force of FinTechs on Banks Bold Behaviour

Mass redundancies at major Dutch banks such as ING, ABN Amro and Rabobank took place against the background of a competitive attack by banking’s own strain of digital disruptors, namely so-called FinTech start-ups. What strategic focus should banks pursue in retail banking when facing technological changes fuelled by FinTech firms?

As an article by McKinsey on FinTechs claims, ‘revenues and profits will migrate at scale toward banks that successfully use digital technologies to automate processes, create new products, improve regulatory compliance, transform the experiences of their customers, and disrupt key components of the value chain. Institutions that resist digital innovation will be punished by customers, financial markets, and—sometimes—regulators.’ According to McKinsey, banks who do not act quickly, risk losing up to 35% of their profits.

The culprit seems to be the FinTechs; financial technology start-ups that compete directly with the retail business of banks. As we discussed in our previous report on changing power structures, megabanks are having a hard time dealing with fast-moving start-ups, since these start-ups are not constrained by their size.

A recent example which exposes the dynamic of these mechanisms includes ING’s mass redundancies from October 2016. These redundancies were partially motivated by a strategic move towards online banking; off-setting their investments in digitalization and technological innovation by saving on its ‘brick jobs’. Put differently, ING is pre-emptively trying to become a huge FinTech by itself before the bank is forced out of competition by the growing swarm of technological disruptors. And just as incumbent tech firms are buying up tech start-upsen masse, banks are also making a move towards acquisitions. In addition, banks actively seek partnerships with FinTechs. The underlying goal is both to incorporate the skills and technologies these firms have, and to protect the bank from future competition.

In the context of increased use of mobile and online technology in consumer markets, the move to web-based and app-based banking makes sense. But it seems as if banks are first and foremost afraid of missing out the ‘next big thing’. According to one report by IT consultancy CGI, this fear leads to a run on technologies that are yet to prove themselves.

What makes FinTech frightening to banks in particular is that they are first-movers with regard to innovative technologies that could destroy the business of traditional retail banking in terms of efficiency and profitability. FinTechs resemble 17th century seafarers, exploring grey areas that governments lag behind in investigating and regulating. On the one hand, as Robert Shiller has argued, it is this grey area where innovation takes place. FinTechs can force banks to turn themselves into adopting a more efficient model of banking, thus benefiting the economy as a whole. On the other hand, it is also the area where consumers are most likely to run risk. One example is the emergence of CfD-based trading apps, that allow consumers to lose money quicker than going all-in on a roulette table.

On a more general note, we tend to forget that the image of the financial sector has taken a huge blow since the mortgage crisis. If you compare the popular appeal of Silicon Valley to the appeal of Wall Street, or compare the appeal of the latest iWhatever to the latest complex financial products sold to poorly informed investors, it’s easy to see that the financial sector has a huge problem with their image in comparison to the tech industry. This makes that the case for a consumer-oriented approach to financial technology is more appealing: banks still have more to gain from building trust and living up to society’s expectations.

This is not to say that banks should shun away from technology-oriented investments, innovations and acquisitions. Certain technologies such as blockchain-based banking are highly relevant. Thus, the rise of FinTechs leads to a paradoxical situation for banks: on the one hand, they have to defend themselves against FinTechs trying to steal their customer base, and keep track of important technological developments that might influence the way they do business. On the other hand, banks are financial service providers rather than tech firms. They can offer way more consumer protection for their customers than any FinTech can, since FinTechs do not hold a banking license and are not subject to the strict regulations banks have to comply with. Put differently, banks can deliver the security that FinTechs cannot.

As a research report by IT consultancy CGI indicates, consumers are not as much interested in fancy innovations, but care more about security, ease of use, and reliability. Thus, for banks, the consumer experience route seems to be the most fruitful. In addition, it makes more sense to keep a customer-oriented focus from a moral and social standpoint. Put differently, it is more responsible to invest in ‘boring’ consumer-oriented technology, for example interface design that makes insight into one’s personal financial matters more comprehensible. In this regard, incumbent banks have one big advantage: they still hold the customer base that FinTech is trying to take away from them. Thus, for banks, it is easier to introduce new consumer-oriented technologies to their customers.

This should lead us to the following conclusion: banks are, first and foremost, financial service providers, not tech firms. They can offer the security that competing industries cannot. Simply by taking deposits and providing consumer credit, they provide a service to society. By focusing on providing secure online services that are easy to use, they can continue to offer their customer base exactly what they wish for.

Also read our recent research article on how socially conscious business has the hidden potential to win the economic rat race (Dutch).