ShowHide categories

The fintech age: banks need to partner up or get left behind

Future banking

Outsourcing is key to keeping up with new technology-driven services

As a rule businesses and consumers want their banks to be safe, solid and conservative. But they also want them to move with the times. If an established bank doesn’t move quickly enough, it leaves gaps in the market for new brands to emerge with a new approach to services.

We saw this happen in the 1990s with the emergence of First Direct, Virgin Money and Tesco Bank in the UK. While in a post-deregulation US, a swathe of mergers and acquisitions led to the rise of new banks and brands, albeit ultimately controlled by traditional financial institutions.

Take Tesco Bank, for example. This was formed in 1997 and was one of the original disruptors in the banking industry. Yet it needed a 50-50 deal with RBS to make its business work. It wasn’t until Tesco bought out RBS in July 2008 for £950m that it became a fully-fledged independent challenger.

Today, things are a little different. While the banking community has grown used to plucky new entrants from other sectors (and has often helped them emerge through partnerships and fulfilment), technology disruption is now birthing well-funded challengers with no branch overheads offering flexible and transparent services.

Rapid change

The UK’s mobile-only bank Monzo (formerly called Mondo) raised £1 million ($1.4 million) in just 90 seconds on equity crowdfunding site Crowdcube in March this year. It’s now valued at around £50m. Another UK-based, app-based bank is Atom, which raised £45m from BBVA last year as part of a £125m investment round. The business is now looking for equity capital to fund a US push.

According to the KPMG Challenger Bank Report 2016, smaller challenger businesses such as Atom, Monzo and Fidor Bank in Germany can offer better rates, lower costs, increased transparency and data analytics. Crucially, they have a lack of legacy, both in terms of customers but also technology and property.

“For the smaller challengers, the lack of legacy IT platforms or more focused IT infrastructure enables them to achieve a cost-to-income (CTI) ratio compared to the Big Five of about 6 percent lower,” says the KPMG report.

So how do established banks compete? In the 1990s, they actively embraced change and tackled the threat of disruption through partnerships. Yet the changes 20 years ago were relatively minor and didn’t undermine the industry status quo, specifically investments in regional branches.

Today, however, traditional banks are in a tricky position: they have a desire to embrace change, but that desire is held back by legacy commitments to servicing traditional channels.

Secure outsourcing

To avoid being left behind, banks need to outsource and partner. Launching a new brand is an option for some – Allied Irish Banks set-up its own challenger bank called Starling in 2014. But for many banks it is a shift to additional services, rather than a completely new banking structure, that will help them keep pace with change and retain existing business.

As banks proved in the 1990s, partnerships with new entrants can help to future-proof their business. The rapid rise of fintech provides opportunities for banks to fulfil the market and plug gaps in their own service offerings. It’s about identifying key, digital-driven services that will help retain customers and encourage new ones to join, not give customers a reason to abandon ship.

For example, the ability to offer card expenditure and balance transparency could improve card delinquency rates and therefore reduce risk and costs for issuing banks. It’s a simple but powerful service that can be tagged onto an existing business with minimum overhead.

Outsourcing works and while challenger banks strive to disrupt using technology to entice new customers, traditional banks have a choice to make. Do they try to beat them at the fintech game by building something new? Or do they match them tech-for-tech, service-for-service through fintech partnerships and outsourcing? History has shown that even in the banking sector, a policy of going it alone will usually end in tears.