Are FinTechs or Tech Giants the Real Threat to Banking?

Incumbent banking faces disruption from two sides

Recovering from the financial crisis of 2008 has been no easy task for banking and investment firms. At the same time as rebuilding trust with estranged consumers, traditional banks have been bombarded with relentless disruption. Since global FinTech investment rocketed in 2014, established financial companies have had to navigate a rapidly changing sector, responding to consumer needs by offering online banking, voice recognition security, artificially intelligent platforms and automated services. Physical branches have also undergone a gradual transformation, replacing human employees with cash machines that can carry out standard tasks like depositing cheques. Through embracing change, banks have managed to survive. But recently, a new threat has emerged – and it’s not coming from FinTech startups.

Who’s really eating banker’s lunches?
It doesn’t take a financial expert to work out why FinTechs may threaten incumbent banks. They’re customer friendly, simple, digitalised, and they don’t force users to sign binding contracts. Despite this, a report by the World Economic Forum has suggested that new challengers haven’t made as much of an impact as expected. Either their influence has been overestimated, or there are other factors at play. According to the report, more financial companies are turning to big tech companies like Google, Amazon, Facebook and Apple (GAFA) for advice and software. This includes cloud computing, Machine Learning techniques like Natural Language Processing and app based services. Brazil’s Banco Bradesco, for example, uses Facebook to allow their customers to carry out every day finance management. Jesse McWaters, the lead author of the report, believes that this relationship will no longer be reciprocal. Another study by Mulesoft revealed that almost a third of respondents in the UK, Belgium, Germany and the Netherlands would consider banking services from GAFA and similar businesses. Their reasons included simplicity, convenience and personalisation. It’s clear that technological leaders have the resources, influence and support to levy a direct threat to banks and insurance companies, but whether or not they will is uncertain. It looks like the jury is still out, with some media outlets concluding that it’s still FinTechs that pose the greater threat.

How can banks respond?
No matter which way you look at it, traditional banks have a problem. Two problems, in fact. But responding to both of these threats includes pursuing a similar strategy. In the Mulesoft report, simplicity was one of the most popular reasons given for considering tech companies as financial service providers. Instead of complicating things by adding extra features and apps, banks should consider streamlining the services they already have. Something as simple as opening a bank account, for instance, is still a time consuming process. Another main factor that influenced respondents’ answers was personalisation – in other words, customer experience. Banks may well feel as if they prioritise customer satisfaction, but this vital business requirement still seems to be letting them down. The results of the Mulesoft report can hardly be taken as gospel, but they seem to reflect changing customer needs. As the rise of FinTechs has shown, consumers want openness, efficiency and straightforwardness when it comes to managing money. In retail, sometimes giving customers what they want can be the most sensible strategy. If tech giants do begin to move into the financial sphere, though, then this could encourage FinTechs and existing banks to work together to combat a common threat. Ironically, this could be exactly what the sector needs to advance collaborative innovation.

So, who presents the biggest threat to legacy banks? Is it the ambitious, consumer friendly FinTechs, or the technological powerhouses of Silicon Valley? It could be argued that startups present the most immediate threat, luring away customers by promising a simpler way to manage money. However, tech giants have the power to force dependent financial organisations to bend to their will. Banks play a dangerous game between using the expertise of tech giants to their advantage and finding themselves completely reliant on them. Whilst GAFA and their competitors haven’t made any blatant movements towards dominating the sector quite yet, it’s something that financial companies would do well to anticipate.

Are banks more threatened by FinTechs or tech giants? Would you consider using banking services from the likes of GAFA? Can legacy retail banks continue to ride out disruption in the financial sector? Share your thoughts and opinions.

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