How banks can thrive amid disruptive forces
Traditional financial institutions are adopting design thinking and a modular, innovation-based approach.
Financial technology firms, or fintechs, were initially seen as a threat by traditional financial institutions, but are now proving to be a catalyst for change across the industry. Fintech startups are booming, and now count some 2,000 in their flock, up from 800 five years ago, according to a McKinsey report.
Fintechs have brought a razor-sharp focus on the individual customer. In that, they have upended long-held business models where traditional banks shaped their products and services around broad demographic groups. They have disrupted cost structures with their zero-fee model. They have also demonstrated that technology can lead the business and set the agenda, unlike earlier approaches where the tech function followed the dictates of the business function.
Consequently, traditional financial institutions are compelled to adopt an approach led by design thinking that is modular and based on innovation. That approach would fold in investments in cloud, data and analytics, DevOps and APIs (application programming interfaces that allow multiple applications to “talk” to each other).
Game-changing business models
Fintechs changed the rules of the game on several fronts. First, they did not segment customers into large groups – they segmented customers into individuals. They said every customer is a segment of one, and that one customer's behavior cannot be same as another – even if they shared similar demographic profiles such as age group, gender, ethnicity or neighborhood. They brought an outside-in perspective in framing their product strategy.
In incorporating customer-centricity in product strategy, fintechs have provided a great impetus to banks. For example, Robinhood Markets, a fintech firm in Silicon Valley, has turned the complex process of trading in stocks into a simple, free swipe across a screen, as a Wall Street Journal report puts it.
In contrast, banks have tended to target customers on the basis of the products they had, be it an insurance product or a wealth management product. They have not fine-tuned so much based on what the customers need at an individual level.
Secondly, fintechs flipped the way the IT and business functions collaborated. Traditionally, the IT function was subservient to business. Most of the strategies were defined and designed by the business teams, and the IT teams were the tech builders of those strategies, solutions and products. Finetchs wanted to use technology to really understand what new products are needed based on customer sentiments, new regulations, and new industry segments.
Take COVID, for example. If we want to look at what new insurance product is needed, technology is in the right spot to make that decision. So, technology takes the lead in coming up with new business strategies. Thus, fintechs ensured that the collaboration between business, the product owner and technology became part of the same table, and not one of business feeding into IT.
Third, fintechs have lowered the cost of operations significantly. Most operate at zero-cost. Never in history have we have had the ability to do transactions for zero fees. In order to achieve zero-cost service delivery, they adopted touchless customer interfaces, DevOps, complete integration on the cloud, 100 per cent chat boards, zero contact centers, and so forth. All that has been a big learning for the large banks and now they are trying to copy that model or at least use it as an inspiration.
A wake-up call for banks
Thus, fintechs have rung the wake-up call for banks. They are clearly a success story – proving that a zero base, nascent industry is able to succeed. They may account for a minuscule percentage of wallet share, but their strategies have worked, and they are producing business for them.
Financial institutions are embracing those changes by bringing in design thinking instead of focusing merely on process excellence. Earlier, they would take a process, break it down, do a complete data analysis to identify pain point or opportunity and address them. Now, there is a shift. They still do their data analysis, but they also put customers at the center, empathize with them to understand their pain points and develop strategies that will allow for adoption. They also have an innovation-based approach, where they use tools like blockchain, low-code development or machine learning to develop solutions.
Alongside, they focused on integrating all that with a multimodal architecture. Tools like APIs, micro services, DevOps, cloud, multi-cloud, hybrid cloud and others that make the back end for the business are now becoming more and more modular and more accessible, much like a Lego block model. Following these trends, financial institutions and banking consulting firms have begun investing in their ability to change the operating models on which they earlier built their banks.
- Fintechs disrupted the traditional banking model by focusing on each customer as a market segment of one, and dramatically lowering the cost base.
- Fintechs have been a catalyst for change. Instead of competing with them, banks are increasingly embracing the new model.
- Technology and business now sit at the same table, instead of business dictating new initiatives and IT teams merely implementing them.
- The new order is made possible by integrating the array of new tools like blockchain, ML-based software, DevOps, APIs and more.