Fintech

5 Ways Financial Companies Can Harness the Power of Digital Disruption in 2017

Have you ever wondered why legions of taxi companies never tried to steal Uber’s thunder by building their own cab-hailing app? Taxi Magic tried it. Who? Right. It didn’t go well.

I’ll leave the case study to Harvard Business School, but here’s the takeaway: Innovators disrupt themselves or their markets because they can. Followers see a hot trend and try to add it incrementally to their existing line of business. Spectators simply see change as a passing fad.

Now consider the banking industry. Everything is in flux – unprecedented regulation, relentless cyberthreats, new technologies like blockchain and AI, ever-increasing customer expectations, and the emerging disruption of FinTech. At the epicenter of change are the financial institutions. Some predict that financial institutions may lose a third of their workforces over the next 10 years because of ongoing financial industry disruption. The message is clear: harnessing and embracing global digital disruption will distinguish the growers and survivors from the casualties in the years ahead.

A Wakeup Call

The Uber/Taxi Magic lesson should serve as a wake-up call for everyone in financial services. Viewing the phone as an incremental channel and not as an opportunity for digital disruption to the broader model will be a mistake. eMarketer predicts the number of smartphone users will surpass 2.16 billion by the end of 2016. Where will it be by 2020? Or 2025? And how will it change the way you do business?

There is a trend of banks narrowly focusing on the end-customer experience alone. It is the complete banking user experience that sits at the intersection of the consumer and their bank. In other words, it’s not just about empowering the consumer, but also equipping the bank users with digital tools to deliver a new, personal banking experience.

The innovators are working to change their entire user experience in response to this trend. They understand that just enabling the customer to think they can see their balance, make a payment, or apply for a loan on the phone doesn’t reduce the end-to-end cost or speed to deliver those services. When you look closely, the proactive followers are working to just duplicate the established customer experience of banking on the phone, as an adjunct to their existing branch-and-teller-based business model. That was Taxi Magic’s mistake.

5 Practices for Digital Success

There are lots of everyday little things that make a company innovative, but at the heart of it is the concept of experience. The transformational advances in innovation over the last several decades have been anchored in experience-based design. More than the front-end that the customer touches, the entire user ecosystem from end to end has been transformed.

There is no magic formula to turning this transformation expectation into a reality for the financial industry. But five practices can help you to benchmark and position your FI for digital success in 2017 and beyond. Depending on your market, size, and ultimate goal – all of the following five topics may not apply. But in today’s rapidly evolving digital landscape, it’s always a good idea to step back and evaluate if your foundation is properly set for success.

1. Evolve towards an open, integrated and unified experience.

Focusing on bringing your defined digital strategy to life in the form of a unified platform will help you to refine what truly is (and should be) your company’s core competency. It will also enable you to plug FinTech partner’s capabilities into your ecosystem.

Also, look to leverage additional technology as a means of enabling the platform approach. A fully functional and secure RESTful API or API Gateway provides an efficient means of integrating cross-platform. Taking advantage of mature SSO technologies like OAuth2 gives users secure, fine-grained access, making legacy silo applications appear integrated into the user experience. Embedding workflow capabilities across underlying assets can further connect the UX.

2. Empower someone in the organization to drive change.

Whether it takes the form of a chief digital/channel officer or a less centralized and formal structure, one common theme will always exist in this journey – there will be significant overlap between this role and almost every other function across your company. This makes it imperative to appoint someone who can drive change, yet get people to collaborate and build company-wide commitment. Ideally, this person will have a balance of hard and soft skills: the ability to craft strategic visions and executing complex transformational strategies, and the soft skills of building relationships and leading by influence. Once a strong organizational foundation is set, the team can get to work defining an integrated, bold digital strategy that permeates into all aspects of the company’s operations.

3. Make partners out of potential FinTech competitors.

In today’s world of FinTech disruption, it’s not enough to keep your finger on the pulse of the competitive landscape. The speed at which new apps and capabilities go from an idea to general availability is astounding, and startups are running fast and lean, and they continue to chip at the edges of the more traditional providers. This is going to continue as new technologies (blockchain, API availability) and new regulation (FinTech banking charters, EU PSD2) opens more disruptive paths for growth.

So get involved. Running, or participating in, accelerators and incubators is a great way to get a much deeper understanding of emerging companies and get in on the ground floor. Many of them today see their only path is hitting a grand slam and disrupting the financial world in a way where all the consumers or businesses have to come directly to them.

4. Put Millennials at the heart of your strategy.

Millennials are the first generation that grew up immersed in the digital experience and the internet. By 2017, millennials will have more spending power than any other age group. What’s more, baby boomers have started to pass along their life savings to their heirs, and this process will continue over the next few decades. When done, some $30 trillion will be transferred from one generation to the next. Ignoring their needs or thinking they live in their parent’s basement will miss the boat.

Nearly 30% of millennials say they’ve never visited a bank branch and prefer mobile banking, yet most of today’s banking experience still centers around brick-and-mortar.

You must pay close attention to this group and look for trends in other industries that might resonate with what you could be doing on your own. For example, take the restaurant industry. Millennials buy in support of local boutiques and farmers and order their coffee from mom-and-pop shops. The just want to get what they want faster by buying ahead of time via an app and then seamlessly picking it up. The former of these two examples is what made community banking such a unique, personal experience in the 20th century. Why can’t these themes be relayed in a digital manner to the banking experience? It’s branch to table: Not just being known and having a tie into their communities, but being able to fully bank from their breakfast tables.

5. Capture the small-to-medium business (SMB) market.

The US has 28.8 million SMBs that drive the majority of the country’s new job creation and innovation, but these businesses view their current banking relationship as a commodity that for the most part isn’t delivering what they need. There are also generational nuances that split the SMB demographic.

Once you have defined your SMB strategy and taken inventory of your relevant assets, focus on the challenges that these businesses face in their day-to-day operations, and perform your gap analysis from there. Five reasons why many startups fail are: 1) no market need, 2) ran out of cash, 3) not the right time, 4) got outcompeted, and 5) price/cost issues. Such failures seem to indicate fledgling entrepreneurs who had high hopes but weak business plans. How about offering assistance in writing a solid business plan to get in on the ground floor and win the entrepreneur’s personal and business banking? Do that and you have a customer for life, not just for the next transaction.

Play to your strengths

At first glance, it would seem that startups have a leg-up on established players. After all, they use the newest and most nimble technology and cloud-based infrastructure to innovate and bring a desirable UX to market quickly.

FIs can use their existing relationships and bold digital strategies to provide a stellar experience from a trusted source. Succeeding in the future will begin and end with the end-user's experience, not just on the latest technological achievement. At the other end of the transaction is still another human being with real feelings who sometimes needs to talk to and interact with another person. That’s a conversation that doesn’t have to take place in a physical building in this new digital world. Our 2016 PACE Report showed that bank customers trust their financial institutions—not startups—to lead the way into the digital revolution.

Total Millennials Gen Y Baby Boomers Silent Generation
Mobile app from my primary financial institution 90% 89% 92% 89% 91%
Mobile app from another source 21% 23% 17% 20% 9%

Identify your gaps and leverage partnerships to fill them

The best way to get going is to identify where your digital strategy has capability gaps. Keep a portfolio ‘watch list’ of potential partners that could quickly fill those gaps quickly and allocate additional avenues to engage these partners.

Some might think that the outdated, legacy technology that the established players are encumbered with is only a detriment in today’s landscape – but there is another way to think about it. The existing banking and payment ‘rails’ that have been laid over a period of decades and the hardened environments that have withstood regulatory scrutiny and cyberattacks are things that cannot be duplicated overnight. There is another path you can show these early-stage FinTech companies, one that integrates startups with the existing players who sit atop the legacy rails of the banking system and complement one another’s strengths. This strategy can make hitting singles and doubles a very successful (and more probable) outcome for these FinTech startups.

Tariq Scott Bokhari

Tariq Bokhari is the executive director of the Carolina FinTech Hub in Charlotte, NC. Tariq has extensive experience building businesses, designing risk and cybersecurity programs, running FinTech accelerators, and building businesses organically. He has spent the last 15 years at FIS Global, GE Capital, Wells Fargo and Wachovia.

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