Challenging the challengers: learning from fintechs
Eugene Danilkis, CEO of Mambu, tells FX-MM how traditional incumbents can create ‘spinoff’ brands in order to challenge their challengers…
Banking and financial services were once the domain of giants, unchanged and unchallenged for decades. However, this landscape has changed, propelled by new technology, customer demand and regulators looking to introduce more competition into the sector.
Today established banks are finding themselves threatened by the rise of fintechs and nimble new challengers.
The new entrants bring innovative services, slick delivery and apply pressure by leveraging the latest technology available. They take a lean digital first approach, enabled by regulators and fuelled by venture capital, and are starting to make significant revenue reaching out to those who do feel underserved by traditional banks.
Established institutions can (and have to) play in this digital market, not just because of the market shift but also because of the opportunities available. The emergence and success of new banks like N26, Monzo and Starling illustrate this well.
New opportunities do exist; McKinsey research has identified a $350 billion opportunity just within the micro, small and medium enterprises lending sector.
The challenger advantage
The number of new entrants is growing and not all of them are startups. Many are backed by large parent organisations like Virgin, Orange and Globe Telecom and interestingly, some are digital spinoffs of traditional banks, like Deutsche Bank and DBS.
Many of these companies have one thing in common, they are operating like fintechs. They are working independently with new culture and using technology to outmanoeuvre the competition.
Start with the ‘right’ technology
The right technology in the form of a core banking platform on and through which all products, services and delivery is based is a key differentiator. It can either dominate resources or enable agile movement in the market.
Traditional institutions invest in expensive multi-year IT projects, build a core banking system and develop a monolith which will clearly sail in a single direction for the next decade.
However, in technology the sands are constantly shifting, companies have to keep learning and changing. With a normal core banking implementation, the risk is that when it is finally deployed, the market and technology have already moved on. Banks cannot afford to follow the path they have always traversed. This is not a sustainable way to stay relevant in an ever-evolving financial services landscape.
A starting point is accepting the need to work and think differently – instead of rebuilding the bank, create a lean, agile fintech spinoff. It would need to be technology savvy, work under a new brand or name and operate independently from the parent institution’s influence. This is an innovation arm created to address a specific market need instead of changing an entire organisation.
If one looks at established banks as cruise ships – large, expensive to operate, process heavy and slow to manoeuver – digital banking spinoffs can be seen as a speedboat. Instead of a lengthy transformation process, they can launch an agile and lean digital bank within 12 months, unrestricted by geography.
The speedboat would work off a lean and flexible technology base and, like many challengers, choose Software-as-a-Service (SaaS) or cloud-based platforms which offer considerable savings on IT infrastructure, resources and time. This approach allows for agile thinking and the ability to innovate and launch new products in a drastically reduced time period, using APIs for integration and software to configure products instead of customising systems.
SaaS has been front and centre in helping to change banking. It allows banks to be innovative – and implement quickly. It could integrate mobile apps, payment channels and build out SaaS-to-SaaS integrations in months, even weeks. A modular architecture would give these speedboats flexibility in their overall system architecture, allowing them to work with best-in-class providers in each area. Value and cost savings are derived from leveraging technology to streamline operations, automate processes and reduce overall cost of doing business.
People and culture
Technology can help build the bank, but it needs the right people and culture to lift it above competition. Challengers are often led and staffed by people looking to work differently and stand out. The spinoff would need similar thinking to work.
This means new leadership supporting a culture of innovation – free to act like a startup incentivised to make the spinoff work – without being held back by the legacy of the bigger organisation and its processes. The key is to incubate quickly, even fail quickly and then try a different direction. This is what innovation is about: the ability to explore and quickly iterate on what works in the market.
Challenge the challengers
Accessing the very technology used by the challengers and using it the right way can help incumbents acquire and service customers off a drastically lower cost base, better allocate capital towards growth, innovation and new products. Lean technology would allow them to serve a customer digitally, more swiftly, without a large bricks and mortar investment, and in the process, possibly attract new customers. The right leadership and culture will help drive it and scale up quickly – and do so without geographical restrictions.
In the long run, clients can be migrated from the old banking to the new option. While this can be seen as cannibalisation, it is a more profitable option than losing customers to competitors, be they a fintech challenger or other top-tier banks taking this approach.
Big institutions have the resources and flexibility to play at the speeds at which startups operate, go into new markets and try out new channels. By leveraging technology, the right partners and a long-term vision, they can become the disruptors and innovators.