Fintech Growth: The Major Challenges Facing Banks
According to PWC’s report “Blurred Lines: How Fintech is Shaping Financial Services?” 28% of banking and payment businesses are at risk of losing revenues in 2020 due to innovative Fintech startups. Fintech organizations are affecting the industry in areas such as payments, money transfers, and personal loans. Companies such as TransferWise created online wallets for customers to transact instantly from their mobiles with much lower fees than banks, this could derail customers from using banking applications for such services.
The main challenge fintechs are bringing to traditional banking is also setting the ‘digital’ standard and customer expectations. In this digital era, customers are demanding convenience, and hence, banks are trying to become digitally driven in their approaches to deliver a successful customer experience across channels. Customers no longer need banks in the traditional sense of deposits and savings, but rather look for banking instead such as payments and remittances. With so many products offered and a legacy, going digital as fast as fintechs and providing the same level of user experience means banks either need to rush the process and compromise on quality, or take their time to catch up and miss on the opportunity of being the first to attract a tech savvy generation. First Abu Dhabi Bank (FAB) is trying a new approach around this with the launch of the PayIt mobile wallet, a product developed and launched as a fintech rather than an additional product by the bank. Time will tell if this method is competitive enough.
Another challenge for most banks is the investment required to develop digital solutions that can compete with the ones already leading, especially in the Middle East. It makes no sense for remittances to be digital while opening new bank accounts is still on paper, so the entire institution needs to be digitized. Any new innovation would cost a large bank multiples of what it would otherwise require from a fintech to develop, especially because several departments are involved and the shear way banks are built (department costing). Fintechs, on the other hand, don’t need to switch to becoming digital, they are born without that legacy and can thus leapfrog into the new banking experience. In addition, the majority of fintechs are created to address one vertical (remittance, payment, etc) rather than an institution with all under the hood, and customers are always willing to shift to other ways that can provide the convenience presented from these digital solutions.
Finally, looking at the willingness of banks to adopt new technologies, often times innovations end up getting wound in the grinding wheel of the bank bureaucracy and maybe even shelved before they launch. Fintech companies can afford to experiment with app updates and features on a regular basis given no approvals are required from regulators. Although many bank CEO’s talk about adopting innovations, the reality is few want to lead as opposed to adopting the ‘me too’ approach to new technologies based on awaiting the results of another early adopter instead. Any new rollouts need multiple champions within the organization and months of building a business case, for that reason these projects take time.
A survey by ArabNet found that 76% of Saudi banking customers use digital platforms and 60% use online and mobile apps. So consumers are already there, and banks need to figure out how to get there very quick. Partnerships and acquisitions are usually the answer in such cases, however, we are yet to see a real fruitful partnership between fintechs and banks or an acquisition in the Middle East to date.