What do banking innovators have in common?

There have been many studies, blogs, book,s newspaper articles, etc on the qualities entrepreneurs have in common. Now the Digital Banking Report’s “Innovation in Retail Banking” gives us a view of how innovative leaders in banking perform.

According to The Financial Brand, these banking leaders share three important characteristics: they generate greater profits, they leverage new technologies, and those of advanced analytics. As a result they achieve higher satisfaction scores.

Why is this important? The simple answer is, because the financial institutions need to embrace innovation and join the digital revolution. That requires strong leadership and a certain amount of fearlessness. Those leaders will need to challenge the current system, as well as push the limits of the available technology. But, perhaps most importantly, the banks need to put the spotlight on the customer, and they need innovators who understand this.

Complacency is the banks’ biggest enemy, and it is something they are finding it tricky to get around. After all, they have been around for hundreds of years in some cases, and have a sense of entitlement. If their shareholders seem content, and the majority of their customers happy, then why do anything to move with the times? This attitude is what is helping the digital challengers.

The neobanks have discovered ways to deliver a more keenly price service and a better customer experience. As the Financial Brand says, “Unlike the iterative innovations from the past, a premium is now being placed on “big ideas,” agility, and real-time application of data for personalized contextual experiences.”

What the banks need to do

For the banks to embrace innovation, they need to think in terms of interdepartmental co-operation, as well as being prepared to break up their legacy systems and rethink them. They also need to look outside their own world and find more opportunities to collaborate with fintechs and look at a range of more up-to-date solutions. They should be incorporating AI, robotic process automation, blockchain and the Internet of Things amongst others into their thinking.

There is also a pressing need to retrain employees. The Financial Brand points out that we are facing a skills shortage, so the banks not only need to embrace retraining of existing workers, they also need to rethink their hiring strategy and bring in more of those people who have been immersed in digital technology since their early years.

The leaders in banking who will win this game are those who are able to embrace these challenges and take their organisations into a new future. The banks without leaders having these qualities will surely get left behind.

 

How to be a winning neobank

In Europe the neobank sector is looking very healthy. It has been boosted by the implementation of PSD2 (Second Payment Services Directive)

This September, otherwise called Open Banking. This effectively means that all the incumbent retail banks have to “release their data in a secure, standardised form, so that it can be shared more easily between authorised organisations online,” as WIRED reports. Open Banking has been happening in stages since 2017, but now we have reached peak Open Banking.

This new legal framework, along with the creation of EMIs (Electronic Money Institutions) supported by PSD1, is about to revolutionise user interaction, and it will also make a major contribution to the rise of the neobanks. It basically gives them an even greater opportunity to increase their market share in the retail banking sector.

However, there are some issues. The neobanks can’t yet offer all the services that the traditional retail bank does. That is not because of regulatory issues, or an inability to deliver a service, but because they don’t have enough funds. While neobanks may raise capital during funding rounds, and even though it may look like quite a significant amount, the big retail banks already have much more capital than any of the neobanks in their coffers.

Customer trust is another issue, especially for those consumers who are used to having a bank branch to visit. The concept of a ‘virtual’ bank with no branches makes them nervous. This has not been helped by some of the neobanks experiencing security issues. For example, Monzo asked a large proprtion of its customers to change their PIN when an unexpected level of fraud was discovered. Hacking is a security concern, as is data privacy. The latter is a problem for all banks, but neobanks are especially vulnerable.

We are also seeing the incumbent banks step up their digital activities through acquisitions, which they can easily afford. Neobanks cannot compete at this level, not can they become more exposed to risk at any cost just. There is a very real opportunity for neobanks, because they are more agile and can offer a better consumer experience, but what they need to work on now is building up consumer confidence — the neobank that nails this one, will be a winner.

Canada needs get ahead in fintech

Canada is an innovative nation, but for some reason or other it is lagging behind its peers when it come to new financial technology. More co-operation between the banks and the fintechs is needed if the country is not to be left behind, as Financial Post suggests.

In the summer of 2018, the Canadian government announced, “it needed someone to study the landscape for financial technology companies, or fintechs, and figure out how they were getting along with the big banks and other financial institutions,” journalist Geoff Zochone reported. As he said, “Large multinational companies have jumped out to a headstart in the race to succeed, and Canada runs the risk of falling behind. At stake is nothing less than our prosperity and economic well-being.”

Toronto-based Fintech Growth Syndicate Inc., won the contract for the study, which became a 240-page report, the first of its kind made available in Canada.

The report used only publicly available data sourced from more than 60 different websites and discovered, amongst other things, that there were “approximately 1,000 fintechs across Canada offering services or products related to crowdfunding, insurance, wealth management, cryptocurrency, artificial intelligence, capital markets, lending and payments.”

Although most of the companies were startups and had small staff numbers, when combined they employed more than 30,000 people and they had an estimated combined value of $30.5 billion. This was exciting. However, what it also showed that very few of the fintechs had partnerships with the banks. Instead the study found “Canada’s Big Five banks may have been increasing their engagement with fintechs, but “the majority of their efforts” were still on building their own products and digital experiences.”

The result is that one of Canada’s biggest industries is innovating at a snail’s pace, plus the country is lagging behind its peers in adopting new financial technologies. It also means the Canadian consumer is probably paying more for financial services than they should.

Sue Britton, director at Fintech Growth Syndicate Inc., said, “To the extent that we could find publicly available information, we were able to show that, yes, there are some fintechs that are partnering with financial institutions. But certainly the majority of those partnerships are on the financial institutions’ terms. They’re not groundbreaking new business models … It’s not going to make the marketplace more competitive, because it’s going to, in fact, if anything, grow the business for the incumbent.”

Sticking with the status quo may be Ok for the banks in the short-term, and consumers may not mind, because they are used to the ‘traditional’ banking services. And it appears that they see no need to shake up Canada’s acclaimed stability on financial services. However, as Zochone says, “the incumbents could wake up one day to find their lunches being eaten by big-tech firms such as Amazon.com Inc. and Apple Inc., which are already offering a payments solution, some more aggressively than others.”

Britton added, ““What our big banks aren’t doing is moving as quickly as other parts of the world, innovating their business models, extending financial services to more small businesses or reducing their fees.” She added, “Perhaps, as Abraham Lincoln famously said, ‘give me six hours to chop down a tree and I will spend the first four sharpening the axe,’ they are still sharpening the axe.”

Royal Bank of Canada chief executive Dave McKay reported in March of this year that he was increasingly concerned with the prospect of Facebook Inc., Amazon.com, Apple, Netflix Inc. and Alphabet Inc.’s Google (the FANG companies) getting into banking. He told Bloomberg, “They are getting between us and the moments of truth of our customers, and currently what they do with that is they sell that insight back to us in the form of search and advertising and other perspectives, and they earn a certain amount of economic rent.”

It will take time for Canada to begin adopting tech like other countries, Britton said. But it will happen.

“It’s not a blip, it’s not a bubble, it’s not a one-off,” she said. “It is the future.”

Bank-fintech collaborations are the way forward