Will traditional banks be disrupted by FinTech startups? What role will banks play in the future?
Read the following opinions by leading innovation experts.
Being a banker used to mean something. Now, the future for traditional banks looks gloomy for numerous reasons.
by Dr. Serhan Ili, CEO of ILI CONSULTING AG
Being a banker used to mean something. Now, the future for traditional banks looks gloomy for numerous reasons: social networks, low interest rate policies, and government regulations, to name just a few. If you become a banker today, you can count on your image dropping a few notches and on having to simply dream about the fat bonuses of recent years.
The downfall of banks stems from both the past and the future. Past burdens represent the smaller issues that will be amortized someday. The outlook, on the contrary, is much direr. Technological advances, low interest rate policies of central banks and government regulations threaten to destroy the existing business models for banking.
The real dilemma faced by practically all banks is – profit margins are under pressure from regulations, advancing digitization of the business, and the possibility that low interest rates will prevail in almost all banking sectors over the long-term.
Technological developments could lead to banks losing the businesses of monetary transactions and lending to other companies. This is a dangerous trend for banks, since technology will play an increasingly key role in the financial sector as well. Even stock trading is now almost fully automated.
Electronic banking is taking over both cashless payments through banks and cash payments with notes, a segment in which information providers are a technological step ahead of banks. Such firms could also challenge the banks’ privilege of money creation and lending by issuing their own crypto-currencies.
Social networks will play an ever greater role in lending. The emergence of crowd funding demonstrates that organizing social events can help bring savers and investors to the table. Hence, instead of asking a bank for a loan or trusting it with one’s savings, one can publicize one’s interests/concerns via social networks. The plus side of this approach is that such business transactions circumvent normal bank processing fees and, thus, can be cheaper for both parties.
Moreover, the low interest rate policies of central banks also crimp the profits made from traditional banking. Money creation through lending is profitable for banks, as long as interest rates hover above those for bank deposits. However, if central banks trim lending rates towards zero, the interest margins for banks disappear – since the bottom threshold for bank deposits is limited and, hence, the deposits can be replaced with cash. Therefore, the longer the low interest rate phase lasts, the greater the number of banks having to give up their business.
The business models of many banks are threatened, not least because of increasing regulations. The necessity to back businesses deemed risky under the regulations with more equity capital, forces investment banks to prune their lines of business and balance sheets. The supplementary equity capital required for relevant banks and their obligation to make it feasible to resolve a bankruptcy without taxpayers’ money, practically obsoletes the model of a global universal bank.
One can fantasize endlessly about what shape the new world of banking may take someday. The same goes for innovation. Technology firms will possibly take over monetary transactions and lending. Yet, regardless of any decisions made by boards of directors of banks, the fact is – there is barely any room for mistakes.
Real innovation demands unconventional thinking outside of a firm’s comfort zone. Consequently, banks must recognize the existence of new opportunities. In particular, they must reexamine their business models in order to perhaps break away from them and utilize novel perspectives to extract even greater benefits.
Dr. Serhan Ili is CEO of ILI CONSULTING AG. He works with leading companies from all industries in the fields of innovation and digitization. He regularly publishes articles, for example in the Harvard Business Manager, and books about various topics, such as Digital or Dead. He is a renowned expert for innovation as well as digital transformation, and he is often contacted for press interviews, for example by manager magazin, DIE ZEIT and Wirtschaftswoche. Dr. Ili studied Industrial Engineering at the Karlsruhe Institute of Technology (KIT), Germany. He went on to receive a doctoral degree in Engineering at the Dr. Ing. h.c. F. Porsche AG in the development center in Weissach and at the Institute of Product Engineering at the Karlsruhe Institute of Technology (KIT).
Banks that ignore fintechs will not win the race, but banks that fear FinTechs have already lost it.
by Dr. Remigiusz Smolinski, VP Business Development & Innovation Management at comdirect bank AG
At comdirect, we are thankful to fintechs for inspiring us to continually disrupt ourselves and to build great products better addressing our customers’ needs. We appreciate the role fintechs play as catalysts for innovation processes and drivers of the accelerated development of the financial sector. We are strongly convinced that future-oriented established banks cannot afford to ignore fintechs anymore. Fintechs invent innovative solutions, develop them with leading-edge modern technology, digital talent, exceptional customer orientation and above of all without outdated legacy structures and system. Their competitive advantage, resulting from their strong focus on a particular customer segment and/or the selection of lucrative elements of the banking value chain combined with efficient management of highly professional resources leads to the “unbundling of banks”.
Fearing the fintechs would be, however, an exaggerated reaction of weakness. Their market share though growing is still very limited, their business models are often unprofitable, and at least in German speaking countries rarely disruptive. Many fintechs have meanwhile understood that their business models cannot survive without partnering with banks and that a consolidation is probably unavoidable.
Many traditional banks have already reacted to the new market entrants and display strong efforts and investments in digitization and innovation initiatives. They have accepted fintechs as equal partners and strive for coopetition, a reasonable combination of competition and cooperation. Multiple trends like open banking platforms and regulatory initiatives e.g. PSD 2 will further accelerate the coopetition between traditional banks and fintechs.
We have recently launched several new coopetition initiatives like the #collabothon2016 or the comdirect Start-up Garage. Our intention is to rethink banking together with fintechs and to sustainably shape the future of the financial industry. We strongly believe that the future holds a place for all banks and fintechs that have the courage to reinvent themselves and never stop searching for better ways to serve the customers.
Prof. Dr. Remigiusz Smolinski is responsible for growing business and driving innovations at the comdirect bank in Hamburg. Before joining comdirect, he has worked at the Otto Group, eBay International, mobile.de, and Lycos Bertelsmann. Prof. Smolinski has published his contributions in various books and scientific journals and works as Research Associate at Aarhus University and is a Honorary Professor at HHL Leipzig Graduate School of Management. He founded comdirect Startup Garage and actively promotes innovations and entrepreneurship in the financial community.
The biggest threats for banks are not FinTech startups from Germany or Europe, but the internet giants or American startups/corporates which have massive financial resources and are thus able to change the market fundamentally.
by Sven Siering, Head of Innovation Management at a large financial institution
In this situation, banks are under a lot of pressure. The financial sector is one of the few industries which is still highly interlinked with its old value chain. However, even in this sector it gets more and more important to think outside the box and to analyze new revenue models beyond the old value chain. This is crucial in order to direct the company into a successful long-term future.
Even though this has been stressed a lot in the media and within expert circles, speed of change is still a foreign word to many bank managers. But this speed of change is the factor which will make the difference for the future in the next couple of years. FinTechs show in a very impressive way what these changes could look like. Does this make them a threat for banks? No, because many of them still concentrate on the classic, fundamental banking model – although this model has no future and will not exist any longer sooner or later. New technologies give the possibility to change value chains (AirBnB, Uber) and to make intermediaries obsolete (block chain technology). This shows that those players will be successful who focus on the development of technology. Today, those are especially American as well as Chinese heavy weights (Google, Apple, Facebook, Tencent …).
The answers of banks concerning their own future can thus only be: technology as driver of the new business, the will to change regarding the business model and the development of additional competences. However, the starting point is far from ideal. The golden years of good revenues are over; cost-cutting programs will only show small impacts and high performing employees see their personal future in other industries. Although these prospects are quite dark, it is not yet time to give up: the most important thing is the will to change – right now!
What does this mean with regard to FinTechs? Many write about cooperation with those companies which can be quite advisable. In order to cooperate with FinTechs, it is necessary to have a clear strategy within the organization. Who do I want to be as a bank? The enabler or the customer touchpoint?
Being the enabler, I can help startups to build their end-user business and put myself in the role of a transaction platform. Being the touchpoint, I have to use the technologies of FinTechs in order to offer added value to my customers. The latter is a challenge to banks because most of the startups do not offer their services exclusively over a long period. As a result, the customers get solutions which are of different colour but of completely identical content. This brings me back to the issue of added value. As long as banks or FinTechs do not change anything about the standard product portfolio (deposit business, stock exchange transactions or payment transaction) and do not open up to new revenue models, there will not be any differentiation. This means that the customer will decide by colour or taste which bank or FinTech he trusts. At this point, critics will point out that the regulation makes such changes impossible. This I cannot contradict completely, but I would like to put forward, that there is always a possibility to move into another direction and change things from the way they were. Entrepreneurs choose their business areas by appeal and prospects of success. The digitalization as a general change of our present management opens up new possibilities we should accept and use.
It is time for banks to realize, that new business models are possible thanks to new technologies. One development is especially important when considering this. While banks of today still have their own technology divisions, it is crucial that the future orientation is a technology company with an affiliated bank. This implies a radical rethinking when it comes to governance, recruiting and marketing. The competition is opened. How long will banks be able to watch?
Sven Siering is Head of Innovation Management at a large financial institution. In this position, he is responsible for building the framework for innovations, co-creation, new business opportunities and cooperation with startups. He owns a degree in business administration from the European University Viadrina, Frankfurt and can call on many years of experience in online business and payment. Sven is an Innovation Evangelist, a Change Enabler and a popular Speaker. His passion is to drive companies forward into the age of digitalization.