In the financial services industry, the underestimation of the opponent is as dangerous as in any other field. And even though we are formally past the stage of confrontation between banks and FinTech startups, there are still classes of startups that can be fairly considered as opponents (like challenger banks or any startup that is moving away from banks and invests efforts in its own licensing).
Companies like N26, Monzo and others have been successfully gaining market traction and reshaping the image of what a modern bank should look and feel like. Startups even make banks appear somewhat archaic and create an image of an innovative, forward-thinking, customer-centric and agile player that uses the latest tech advancements to create the best experience.
That image, however, contains an underestimation of the institutional opponent. Whatever the market scenario is, banks have a couple of aces up their sleeves that they can use to their advantage to connect with customers at a deeper level. Some of those aces were recently mentioned by the British Bankers’ Association in a report called “The Way We Bank Now: Help in Hand” along with advantages emphasized by other industry professionals. Let's go through some of the most important ones:
Incompatible customer base
Above all, financial institutions have an unbeatable customer base built through generations of satisfied clients. As of January 2016, German N26 had 100K customers, while, for example, Deutsche Bank, even back in 2010 had ~10 million.
Cathy Bessant, BofA’s COO and CTO, has expressed the same idea when the bank committed $3 billion from its annual budget for investments in technology and innovation. “I see a lot of emerging companies that want to make it big. We provide the ‘make it big,’ with our 30 million customer households in the US and one of the largest networks of financial advisers,” she said.
Relationships with households built through generations
Large financial institutions are armed with history lessons and long-standing relationships – often going back through customers’ lives or even into previous generations. No challenger bank or any other FinTech startup has that bond with households as banks have. Often targeting millennials or underbanked populations around the world, startups are positioned to work with the present, to grasp attention and build relationships from scratch.
Given that financial decisions of younger generations in some areas are largely influenced by parents, banks are well-positioned to gain new clients in the household where they are already serving the older generation. In fact, a recent report from Private Banking and Investment Group Merrill Lynch called “Millennials and Money” suggests that:
“...young people aren’t rebelling against the traditional investment approaches advocated by their parents—not only do most say they would have no objection to using their parents’ financial advisors, they are also most likely to describe their investment philosophy as 'buy and hold.' They aren’t turning to their friends and peers in their digitally managed social networks for investment guidance and don’t uniformly spurn professional advice. To the contrary, eager to learn, they seem to value expertise wherever they can find it.”
Established distribution infrastructure (physical & digital)
Since banks have been around for a while, they went through years of growth and development, adjustment and learning. They have enormous and powerful sales force and are well-educated in customer service.
Over the years of learning, banks have organized their infrastructure in the most efficient way they could to meet regulatory requirements, to offer an endless array of services to various customer clusters and in case they need a costly restructuring, their pockets are deep enough to afford that. Moreover, despite the perception that traditional banks are too old to ‘slay’ in the digital space, again, their pockets and access to the most skilled talent allow them to learn and adjust in no time.
As for the physical – bank branches are here to stay as they prove to be of immense importance for the small-business community and customers. Studies and a range of banking professionals prove physical branches to be relevant and of economic benefit for the institution and the community. Fortunately, nobody knows the business of bank branches better than banks.
Access to talent
Banks have been extremely smart in turning the competitive landscape into a supportive one by rushing to launch or support innovation labs, incubators and accelerators. Through these ventures, they gained access to the most talented teams with groundbreaking ideas. They have enough funds to financially support the development of disruptive solutions under their wings and harvest the results.
Citi, Capital One, Bank of England, Barclays, JPMorgan and a range of other financial institutions are firmly rooted among ‘rivals’ to keep up with the pace of technological advancements and take the best that bright entrepreneurs can offer.
The valuable asset of information
Long-established relationships not only benefit financial institutions economically, they also generate a vast amount of important data. As BBA suggests, “The vast pool of customer data that can be derived from such interactions means banks can understand more accurately what customers are trying to achieve, and use digital to interact with them in a more meaningful and relevant way to help them make good financial decisions.”
Powerful political lobby
Political influence is one of the most important assets often underestimated or neglected. At the end of last year, BBA, Payments UK, the Council of Mortgage Lenders, the UK Cards Association and the Asset Based Finance Association – five British trade associations – were set to merge their efforts to create a stronger lobbying power, backed by nine British banks, including HSBC, Lloyds and Barclays, and building society Nationwide. Among other things, the effort towards a merger is also aimed to cut costs and increase efficiency and power over European regulations.
Some recent estimates suggest that a range of commercial banks have contributed over $30 million on banking lobbying efforts so far in 2016. Having a lobbying power in the financial services industry is an extremely valuable advantage given the complexity of legislation and the cost of licensing.
Moreover, while tech companies are more on the side of startups and have been pushing a deregulatory agenda recently (mostly because they are actively getting into the financial services industry themselves), banks, on the contrary, are urging regulators to toughen up on FinTech. Having enough funds to fuel their ‘campaign,’ they have a vote in the way the market environment will work for FinTech.
There are certainly more advantages that large and established financial institutions have over young competitors, as well as shortcomings. The power of FinTech startups is often an overhyped by startups themselves perception. At the end, time has taught that not everything goes smooth even with the largest players, not mentioning the ‘insignificantly’ small ones.
Thinning patience for unprofitability and highly questioned business models were perpetuated by devastating fall of some formerly highly successful giants of FinTech. Meanwhile, banks have been steadily evolving and absorbing the best practices without unwisely betting too much on uncertain ventures and technologies.