FinTech Flank Attack on Banks
Every time my work requires me to interact with the Senior Management of any of the large Banking Institution in India, it feels like Deja Vu’. Twice over.
Once, because I hear a similar refrain from almost every bank and two, because we have all heard it many years ago, from the likes of Blackberry, Nokia and Kodak. Or worse, the likes of Garmin and Tom-Tom who never even got a chance to say anything, while their entire industry was swept away from under their feet.
Fintech is small today as compared to the ‘too large to fail’ banks (and we now have a list of that in India too). But they are definitely present, at the right spot, solving the right problems for the customer.
That is the key – solving the right problems! Attacking banks where it hurts the most.
What started as simple peer to peer payment mechanism, has now extended to savings, loans (individual and SMEs), insurance and now with a complete BaaS (Banking as a Service offering).
Too Big to Fail; Too Small to Impact
To their defence, most banks defend from a revenue standpoint. A bank’s revenue is divided largely into the following heads,
- Interest on loans / investments
- Treasury operations
- Forex operations
- Term deposits
All of this depends upon one big factor – CASA ratio. This is nothing but the amount of current account and savings account deposit a bank has; this is the ‘cheap’ fund that the bank has, which it lends out at atrociously high interest rates (well!), and this difference in interest rates form their major revenue base.
These deposits (and lending) that the the banks currently handle are huge – which is what makes them ‘too big’. They have the money and the customers (and their data, which they really havent used too well).
So how do you beat them? Just like how you beat any big industry player! By changing the industry itself.
So Fintechs, instead of trying to fight the big banks on their turf of money and customer base, have directly gone to the consumers, using the one medium that is ubiquitous these days – technology, and the access it provides.
Technology At The Core
Gone are the days when ‘IT’ was just a department in an organisation. Startups have turned this entire setup on its head. With technology at the core, they have destroyed the entry barriers for most industries – Banking, Transportation, eCommerce, Insurance. And the reason they have been able to do it successfully is because of one primary reason – access to customers. Technology can reach customers where they are instead of the other way around.
Technology today provides access to customers in such creative ways which traditional businesses have never explored. This key to customer access is what is at the center of this impending chaos and massacre.
Even while we hail the new-age companies who are better able to access consumers, and the traditional ones still dragging their feet, let us also pay heed to the fact that it is not all their fault.
The customer ecosystem has evolved; consumers are more tech savvy today than just a decade ago and they are less patient, they are pampered and they do not want to go the distance. And everything has happened too fast. Which is where new companies stepped in, walked the mile using technology, and reached them first; and much faster than the traditional firms, who given their size and in some cases mindset, were unable to move that fast.
Problem is not with them.
Problem is with the ones who are either still gloating in their ‘size’ or their historical ‘brand’ strength or who think that the current consumer trends are just a ‘fad’ and will pass by without harming them.
Two industries where these trends are most pertinent: Banks and eCommerce (Retail).
It is OK if a startup starts the innovation cycle, it catches up with the consumer, and then the industry follows.
It is not fogivable is if this happens again and again. Innovations in the financial space started with retail customers a few years back; now it is extending into the corporates and even while Fintechs have a long way to go before making a major dent in wholesale banking (esp. for large corporates), given how the world works, I believe it is safe to say that its only a matter of time.
Evolutionary changes won’t get the current set of banks anywhere. It has to be a revolutionary change.
Technology Needs to Drive Business
So here’s the thing. Business are too involved with their day to day stuff and are probably not seeing the ground shift. But shift it is. Technology so far has only meant the ‘IT Department’ for most banks – the backend systems that they think about only when something’s not working right. This needs to change. The only way to catch up to the revolution and shift that is underway is to let technology and data take the lead on business. Breaking down the erstwhile power centers in business is essential.
Its not about ‘this is what a bank is supposed to do and for technology to support it’. It is now about ‘this is what technology can do for consumers and the bank needs to rally around it’.
And if this means that Banking ‘business verticals’ start reporting into the ‘IT department’, so be it. Ofcourse not trivialising the change that the IT department itself needs to go through. IT department here does not mean the old mainframe and data center maintenance departments but a new age and probably newly setup tech and consumer centric department staffed with the best digital, consumer experience, marketing and business minds that a financial services firm can get and afford.
If banks have to survive the next 10 years, they need to change their engine, lest they will be pulled backwards and brought to a complete halt.