There have been plenty of reports about fintechs being bad news for banks, but in actual fact they may be the best thing to happen to traditional banks and the banking sector for a long time. No, really.
Many have warned that the introduction of digitally savvy options into the retail banking sector will prove to be a disruptive force in the sector. After all, just look at the impact Uber is having on taxis or Airbnb on hotels.
In a heavyweight match between traditional retail banks and digital innovators, no one would bet on the traditional banks.
These two kinds of financial organisations, however, are in less of an all-out fight and more of a breakneck race towards the bank of the future. And this is a race that “traditional” banks might just fare well in.
The FCA’s new regulatory sandbox, aimed at supporting innovation and promoting competition in the interests of consumers, is to be applauded.
By and large this move to make it easier for innovative fintech firms to challenge the well-established practices and processes of banking giants should be seen as a positive sign that the industry is at last ready to embrace change.
The announcement is creating a lot of buzz among financial regulators across the world, with the UK being recognised as creating a vibrant ecosystem for fintech innovation. In fact, a report this past February published by HM Treasury in partnership with EY, declared the UK as the global hotspot for fintech innovation.
New digital banking options like GoBank, Mondo, Venmo and even Apple and Google are challenging many aspects of a banking sector that’s seen as too set in its ways. They are built specifically for the purpose of online and mobile service delivery, making them more flexible and scalable as technology and consumer trends change.
Many traditional banks, on the other hand, saddled with figuring out how to integrate their traditional operations into online and mobile platforms are now pushing beyond their traditional boundaries to quickly rebuild, digitise and diversify as never before.
Traditional banks are now upping their innovation game to compete with their digital counterparts. This race between challenger and traditional banks presents an innovation gold mine.
Established banks do have some aces up their sleeve. Stronger security systems, a pre-existing customer base, established delivery channels and financial expertise, along with experience navigating many of the financial regulations are all in their favour.
These advantages create a stronger base from which to innovate. While the challenger banks innovate more quickly, they also have an increased risk of stumbling and falling by the wayside.
Not forgetting, many traditional banks also offer one service over many challengers that is surprisingly appealing to millennials: real, live people. Alongside older consumers, they prefer the presence of brick-and-mortar banks.
In the race to innovate to meet evolving customer expectations, challenger banks and fintechs still have some work to do. They must keep up the pace of innovation while also building up security and determining how and whether to offer a channel for human interaction.
In order to stay in the innovation race, traditional banks must play in the same space as their noisy neighbours. They need to move away from the types of legacy technology designed for a traditional branch-based, one-dimensional banking experience, and work in environments like the FCA sandbox.
While the task at hand may appear daunting, all of these efforts to outpace each other is good news for us as consumers. Both traditional and challenger banks are racing toward the same finish-line: creating safe, convenient and digitally accessible financial services and products of the future.