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Is banking broken and can fintech fix it?

Future banking

Fintech solutions offer banks a great deal and they can offer new ways to deliver services, however, in order to make the most of the opportunities banks need to look at the way they work.

The recent financial losses at RBS are a stark reminder that the post-2008 banking sector is still suffering from a hangover. Coupled with on-going issues at Wells Fargo in the US and Deutsche Bank in Germany, the latest set of results from RBS adds fuel to the fire that traditional banking will never be the same again. Some say, broken.

In fact David Gerbino at DMG Consulting goes further by suggesting that: “The sad truth is that traditional retail and business banking has been broken for decades.”

Certainly banking has been slow to embrace change. But the problems at RBS, Wells Fargo and Deutsche Bank are the canaries in the coal mine. They are a warning that low interest rates and regulatory pressures have created a culture of low profitability and misconduct across the sector.

Fintech isn’t blameless in all this. New technologies have been threatening the banking status quo for some time now. But few businesses have actually managed to disrupt it. There is a catch-all perception here that fintech equals loss of profits and a threat to the very existence of banks. That’s not true.

Fintech isn’t always the panacea

Certainly new payment technologies are gaining traction, but not all of them are succeeding. The spectacular crash of UK unicorn Powa Technologies earlier this year is a clear reminder that there are risks on both sides of the fence. This is not about a golden generation of geeks trying to rewrite the future. Fintech businesses need the banking system.

Fintech offers banking a new way to look at and deliver various aspects of their core business, from payments security and investment analysis, through to cash and card management. Certainly, investment banks have a potential role here in helping fintech realise its potential.

According to a recent Boston Consulting Group (BCG) report, investment banks find themselves under similar pressures to the retail sector – unfavourable economic conditions, escalating capital requirements and stubbornly high costs. It’s a combination that continues to depress the performance of many investment banks. A collective six per cent ROE in 2015 capped off five years of dismal revenue results, says the report.

“Fintech is introducing new paradigms that Capital Market players can exploit to their advantage in a landscape that is complex and difficult to navigate,” says BCG.

“By establishing labs to focus on early-stage, novel technologies that are core to their principal activities and by systematically pursuing adjacencies that have synergies with their existing portfolios, investment banks can position their businesses for a bright, digital future. Yet time is of the essence. Banks and the entire capital markets ecosystem must take action now in order to gain the considerable benefits that are achievable.”

Banks require a culture change to succeed

It’s a good point, one that applies across the financial board. As 2017 approaches, can banks utilise fintech to increase profitability and build a future that will cure the ills of the past? Certainly, there’s a big opportunity here. But it demands a culture change in banking management; embracing outsourcing. Banks themselves cannot do it all quickly enough, so it also makes sense to partner with fintech services to explore potential new opportunities in payments, online business card management, automation and virtual financial products.

By adopting a new mindset that welcomes fintech rather than fearing it, banks can start to enjoy a happy new year.