Opinion By Ivan Kot is a Senior Manager at Itransition
At this point, fintech companies are no longer cool kids on the block but established banking industry members. A few years back, these innovative technology-driven startups have recognized the conspicuous gap in customer service that most traditional financial institutions had been continuing to ignore. By enhancing the customer experience with a range of modern technologies, they quickly became a threat to many established institutions.
While some have cited the absence of overheads associated with physical branches as the main enabler of this unprecedented growth, providing digital-first customer services is what really attracted millions of businesses and individuals alike. Unsurprisingly, the all-permeating trends of 24/7 online access and exceptional personalization once created by such startups have spilled over into stock trading software development (https://www.itransition.com/finance/stock-trading-software), mobile banking apps, and payment platforms. Netflix-raised generation of customers will choose to apply for a mortgage via their phones instead of going to a physical branch.
It doesn’t feel right to blame conventional banks for ignoring this demand for so long, as it’s increasingly hard to innovate when you are drowning in the swamp of legacy systems. For a large corporate bank, launching a chatbot can require a significant revamp of core systems. In contrast, deploying a sophisticated ML-based ID verification system for a neobank is a comparatively easy task, especially with a current surplus of innovation-centric vendors.
It’s out of the question — fintech companies are here to stay. The question is what conventional financial institutions need to do to stay relevant.
Cooperation is the way out
At first sight, it may seem that fintech companies have a range of unparalleled advantages over their traditional counterparts. Their ability to innovate, iterate, and adapt to the ever-changing customer needs is unmatched. Stripe, for example, is now one of the largest private tech companies in the U.S., which paved its way by making it easier for SMBs to deploy payment systems on their websites.
Most importantly, these new-era payment platforms like the Chinese Ant or the Singaporean Grab can determine consumers’ creditworthiness by analyzing their payment transactions. With access to inordinate amounts of data and advanced analytics, it’s not surprising that such companies can determine if a borrower can repay loans more accurately than borrowers themselves. By using this method, it took only six years for Ant to account for nearly 10% of the Chinese consumer-finance market. Ant’s rapid expansion could only be stopped by the regulators, and this is exactly what happened in 2020.
Traditional banks still rely on their gut feeling and credit histories to assess creditworthiness and ensure loan security against borrowers’ current wealth. In this context, the advantage of these tech platforms is truly unrivaled.
At the same time, new banks can’t possibly match the level of trustworthiness, credibility, reputation, expertise, and industry knowledge that an established decade-old bank has. Crucially, they also have much more funds to lend, but often don’t know whom they should lend to. And, incidentally, most fintech companies have the analytics capabilities to accurately assess the creditworthiness of potential lenders, but hold much less capital. For an emerging fintech startup, obtaining a license is often a hard proposition, especially when regulators are forcing them to raise more capital and withdraw the most fruitful credit offerings.
For traditional banks, relying on internal resources to compete with nimble fintech startups is a bad idea in the majority of cases. The inflexibility of legacy solutions is a pressing barrier. At this point, it should be quite evident that these two generations of financial companies complement each other in many ways. Fortunately, conventional banks often have more than enough resources to acquire or partner with technology-centric companies. For traditional banks, this is the fastest and most efficient way to satisfy customers’ demands for personalization. For fintech companies, partnering with big established banks is the easiest way to scale and grow.
Another seemingly perfect way for everyone to benefit from fintech disruption is ‘open banking’. Indeed, the idea of sharing access to customer data should equally benefit all industry players. However, lavish amounts of sensitive financial data exposed by open banking can also be used for the wrong reasons. In any case, hoping that open banking will help banks to bear up the pressure of fintechs is an intrinsically bad strategy.
Conclusion
In this industry, working in tandem is a path of least resistance. It’s hardly a compromise but a very logical way for traditional banks to capitalize on existing customers, diversify and streamline access to product offerings, and decrease transaction fees. What was once considered rivalry has now turned into an opportunity for profitable partnerships. Using the best of both worlds, the collaboration between emerging digitally-led financial companies and traditional banks will surely drive the economy further.
Ivan Kot is a Senior Manager at Itransition, focusing on business development in verticals such as eCommerce, Business Automation, and cutting-edge tools such as blockchain for enterprises. He began his career as a developer, taking different positions in both web and mobile development projects, and eventually shifted focus to project management and team coordination. Ivan’s everyday motto is: if something has to be done, it has to be done right.