The needs of customers have become increasingly complex and for financial service institutions to meet these, it must work together.
This partnership has been coined by FSI specialists as “co-opetition”, to describe the collaboration over open API’s and the potential competitive threat fintechs present. These startups are more agile and often better-equipped to offer customers digital solutions that meet the growing demand for personalisation and simplicity. But as the fintech revolution is still in its growth phase, some haven’t yet acquired banking licenses to support customers’ back end needs.
This unexpected alliance is generating new business models for both banks and fintechs, with the startups opening up applications using a Software as a Service (SaaS) subscription models. This isn’t a new idea – the likes of PayPal have long been charging businesses per transaction via platforms. In fact, software giants have been driving forward this revolution for years.
While there is a great deal of cooperation taking place in the industry, banks must be wary of fintechs who are capable of cannibalising a bank’s business by offering competitive services that are much faster, simpler and more user friendly. For instance, transferring money is, for the most part, still a painstaking process, despite mobile and internet banking. The need for a complex list of payee’s information, makes what should be an instant process, a lengthy one. By layering money transfer applications over communications channels, such as WhatsApp, customers could send money to their friends via live chat.
The fact is that fintechs don’t have the trust or profile of big banks, whose customers are using legacy bank account offerings. In order to meet customers on the right playing field, fintech firms are collaborating with banks to provide customers with improved value offerings. This doesn’t necessarily mean there is a growing loyalty to individual banks – the partnership is centred on serving the customer.
In Germany, the number of divorces are higher than the number of people who switch banks, and this isn’t because customers are satisfied. The process of changing banks is so archaic that customers cannot see the benefits outweighing the time and energy needed to invest in this. Thankfully, fintechs are creating services that quickly move a customer’s entire financial profile over to another financial institute. It isn’t just about moving money – fintechs simplify the process by duplicating standing orders, direct debits and even alerting the appropriate organisations of a customer’s new details.
With this level of ease, the age of customer loyalty is over. Banks will need to start providing customers with intuitive and insightful offerings in order to retain them. So the financial services market is becoming more saturated, with a number of fintechs being able to directly compete. To combat this, banks will need to provide fintechs with greater financial incentives to collaborate, rather than compete head on; something many fintechs are aware of.
UK-based fintech firm Open Bank Project runs its business model on open API’s in order to “empower financial institutions to enhance digital offerings”. With growing interest from the government, who are realising the potential of fintechs to simplify personal financial management, banks must be ready to invest and capitalise on these innovations, to avoid losing support. In short, banks need to make a decision; compete with fintechs or cooperate to survive.
The nature of fintechs makes them more agile and adaptable to changing customer needs; traits that come with being a digital entity. In order to compete with fintechs, banks will need to rapidly innovate by investing in digital solutions. So, the question banks should be asking is, will fintechs be my allies or my competitors and if it’s the latter, how do I equip myself to contend with them?
Felipe Arroyo Ivancic is project manager of banking transformation and innovation at SAP.
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