Historically, the banking industry has been highly resistant to disruption by technology. From 1984 to 2007, retail banks posted average returns on equity of 13 percent (McKinsey & Co). Within that time frame we saw the advent of the internet and the dot-com boom, including the emergence of PayPal as an internet payment service, which remains among the most popular today. In fact, PayPal is one of the very few companies to challenge the retail banking industry and survive. 450 companies tried between 1995 and 2002. Less than 5 are still in business. That's how tough it was to disrupt the banking industry. About 1 percent tough.
Established banks and insurers were seen as stable and enduring brands, and consumers have been slow to change financial service providers. But the financial crisis of 2008 left some consumers questioning the trustworthiness of retail banks. The technology wasn't quite there yet, so we didn't see significant growth in fintech until several years later.
In 2013, global venture-capital investment in fintech totaled $4.6 billion. In 2014, it shot up to $12.7 billion, then $22.3 billion in 2015. (Accenture)
The recent financial crisis combined with new technology and increasing consumer desires for mobile banking created a perfect storm for disruption in the retail banking industry. However, it's not without its challenges.
- Currently an unregulated industry, and it is yet unclear how it will be regulated in the future as the industry grows. (American Banker)
- Cannot offer the all of the same traditional products and services of retail banks.
- Fintech companies lack the longstanding reputations and perceived legitimacy of the larger retail banks.
Retail Bank Shortcomings
- Lack the agility and infrastructure to develop new technology quickly.
- Legacy systems that cannot communicate well with new technology and APIs.
- Decreased trust and stained reputation in the eyes of consumers.
- Growing demand for fintech offerings.
- Losing business in emerging markets to fintech companies.
Partnership Opportunities for Retail Banks and Fintech
Both sectors have issues to contend with, many of which are simply the contrasting strengths of each other. Fintech can earn more legitimacy by joining forces with a retail bank. And retail banks can bring all the new tools under their own roof and meet the consumer demand for fintech. In fact, many large banks have already purchased or started funding fintech companies to move in this direction. For example:
- Santander InnoVentures
- Citigroup / Lending Club
- Groupe BPCE / Fidor Bank
- BBVO / Holvi
- BNP Paribas / SmartAngels
- J.P. Morgan Chase / OnDeck
Whether looking at the situation from the perspective of the retail banks or the fintech companies, survival will depend on innovative use of data. Advanced customer profiling and predictive analytics will be key in developing effective omnichannel experiences for consumers.
Customer journey mapping should also be a priority for anyone trying to tap into these sectors. Modern consumers know that you are watching, and know the value of their data. They expect more from any company they choose to work with, be that a retail bank or fintech company. Either entity will need to work towards an integrated database, breaking down data silos, and enabling advanced analytics to deliver the best experience. The faster you can combine, segment, and visualize your data, the faster you can identify patterns, trends, and needs in the market.
Infographic: Cashing in on Omnichannel
Case Study: Conversion Optimization
The growth of the fintech industry is a clear indicator of evolving consumers. Retail banking had never been a very customer-centric business, but that is changing thanks to this recent disruption. Traditional banking services that were once bundled together under one roof are now spread out across fintech offerings. However, this still is not the optimal environment for customers. At some point the experiences must be united. Partnerships between retail banks and fintech companies seem to be the fastest route to that point. If the goal is to become a banking "one-stop shop" then innovation must be embraced. The fintech companies have a better grasp on the technology and data, but the retail banks have the customer base and established credibility (despite the financial crisis).
Retail banking disruption has created the opportunity for fintech companies to establish a footing in the financial services industry. The ones that land partnerships and embrace data will take the next step toward providing an omnichannel customer experience.