The banking industry is beginning to feel the pressure of developments in the FinTech sector. Technology startups are looking to disrupt banks and insurance companies, particularly by leveraging innovations in customer experience like internet and mobile-enabled services that are consumer-friendly and easy to access.
Looking back to about five years ago, another market was really starting to see the effects of digital disruption: telecoms operators. This came with the development of what became known as over-the-top (OTT) companies. Services such as Netflix, Skype and WhatsApp started to use the internet bandwidth provided by telecom operators to give users new ways to consume media and communicate.
Upgrading the Networks: How Telecoms Held off the Disruptors
Looking at the industry today, it is very clear that the telecoms operators have survived the initial threat and still maintain their position and revenues in the current market, as they have managed to focus on their strategic advantages.
Firstly, they have gained through using their excellence in providing connectivity over both fixed and wireless networks, particularly with the development of network projects that typically require huge amounts of money. Upgrading to next-generation networks will help them retain their competitive advantage, enabling them to provide advanced services like traffic management, tiered quality of service, customer analytics through big data analysis and advanced security and location-based services.
Secondly, they maintain a dense distribution footprint that includes a strong retail network, supply chain and logistics services and thus can collect huge amounts of demographic, behavioural, and usage information about customers.
How Institutional Banks Can Beat the FinTech Challenge
In the same vein as the telecoms operators’ strategies, financial services companies’ competitive advantage lies in their infrastructure for payment transactions, and multiple compliance and risk operations that are often impossible to replicate for the newest startups, given required capital and intense regulatory scrutiny.
This is why there is an ever-growing trend of banking as a service (BAAS) technology operators that allow young FinTech startups to utilise the existing infrastructure of bank accounts and payment circuits whilst building great customer-focused experiences on top. Looking at the the ‘new banks’ market, it is pretty clear that these operators are little more than a user interface on top of existing infrastructures.
In fact, they all issue Visa or Mastercard cards that rely on existing payment circuits, and are often doing little more than opening accounts in a partner bank to avoid the lengthy process of obtaining regulator approval and building the infrastructure from scratch.
In this environment it is clear that in order to retain their important market position, existing players must envision strategies that are similar to those adopted by telecoms operators in order to survive:
- Banks should be investing in payment and compliance infrastructure and offer new FinTech companies solutions that are low-cost and pay-per-use, to allow these players to operate on top of their infrastructure. This includes knowing-your-customer services, anti-money laundering checks and account security.
- Banks should also leverage the huge amounts of data they have access to, and learn how to best package the access to the data through easy to use APIs.
- Banks and insurance operators have a huge footprint with a number of sales representatives, branches and local integrators, which can be leveraged by the FinTech industry to get closer to the customer and find a new point of access for their products.
Adapting the Strategy
All these strategic advantages should be part of what banks invest in over the coming years with the idea to rent these as a service to the FinTech companies that are looking for new avenues to grow.
This would provide a competitive advantage for the traditional industry that will be retaining leadership in access to network and infrastructure; with an eye to consolidating with certain technology apps and services that think will succeed.