In part one, I talked about the views of the Fintech start-ups who begin with thinking: how can I transform this financial process using technology? Banks think differently and begin with thinking: how can I apply technology to this financial process? The core difference is that banks think Techfin rather than Fintech. They begin with their existing operations and wonder how to improve those operations with technology. It’s a very different mindset, and works differently in different markets.
For example, an investment operation in the capital markets space or a prime broker are far less fearful of ditching existing technologies and reinventing their operations than a large retail bank. This is not surprising as an investment bank is competing in an ultra-cut-throat marketplace, where technology has been the competitive differentiator for some years. Take the rise of High Frequency Trading using low latency technologies, and you can see a completely restructured capital market that has been transformed by technology in the last decade. Compare this with a large retail bank with millions of customers whose primary focus is safety, reliability and stability, and you can soon see why retail banks are stuck with legacy technologies whilst their investment bank counterparts are running at light-speed.
So you cannot view the banking marketplace as some homogenous structure but, at high level, it is certainly the case that investment banks think far more like Fintech firms than retail or commercial banks. The majority of the large retail commercial banks have a challenge that is very different to the Fintech firms and their investment counterparts, and that is how do you transform a business where the customer expects no risk and minimal change?
This was well illustrated to me by a conversation with a digital bank leader who explained that each time they change their mobile app, they get more complaints from customers than compliments. Customers don’t like change, especially in their bank. Change implies risk, and general banking should avoid risk in the eyes of both the bank and their customer. As a result, customers are generally reluctant to switch banks, and do not expect their banks to switch systems they use. Change the website design, add more mobile functionality, restructure the operations and, if any of this is visible to the customer, they scream FOUL!
This is why so many retail and commercial banks find they are exposed to negative publicity if they close a branch, charge a fee for improved service or upgrade their systems. Any fault, glitch or failure gains headlines of gloom. Any downtime, lost transaction or missed payment results in regulatory review.
Hence, the Techfin firm has to focus upon technology improvement rather than total transformation. Techfin firms cannot think like Fintech firms, because their customer doesn’t want them to. This is why Techfin firms – the incumbent banks – are not dinosaurs or technology deniers, but purely pragmatists who are improving their operations with technology rather than trying to disrupt and transform them.