Fintech won’t kill established financial institutions, but it will change them
There is an overly simplistic picture of the market dynamic in financial services. Disruption is underway, led by market entrants with new business models and no technical debt. But the “old” market is responding — copying, buying and partnering with fintechs as they adapt to market changes.
Yes, there will be casualties — institutions that don’t adapt fast enough. And the process of adapting is urgent for those that survive and thrive, and will be painful.
This was the message that came over loud and clear from the roundtable we hosted last week for digital leaders from financial services organisations. We had representatives from established institutions and fintech usurpers in the room.
What we also found — that may surprise the champions of change — is that many of the challenges faced by fintechs and the old guard are the same.
Culture versus tech
The fintech technical arms-race is often a distraction: features are mostly copyable or buyable. Culture — the messy, human dimension of digital transformation — is much harder to create and sustain. But culture is key to sustaining an organisation that can thrive in constantly changing conditions.
The fastest-moving, whether large institutions or start-ups, share common traits in culture and capability:
* Transparency and latitude within clear limits for their people
* Agile business methods not just tech delivery
* Workflow tools that create visibility across the organisation
* Organised to deliver the Target Customer Experience not slavishly follow the target operating model.
These characteristics are deep rooted. You don’t get them by giving staff iPads. It’s harder than that.
Perfect is the enemy of good
A culture of “measure twice, cut once” is prevalent, partly driven by desire for predictability, partly by the regulator. “Failing” is still career-damaging. Lip service is paid to “fail-fast, learn-faster” but pivots are rare. Certainty is preferred. So a desire for rigorous perfection is still largely dominant over small experimental iteration.
Regulation, regulation, regulation
Compliance is costly, time consuming, complex, in a state of near-constant flux, and utterly indispensable. The competency and pockets deep enough to manage compliance are a competitive moat for big banks, and a massive barrier to entry for smaller players. Regulation may well be the reason we are yet to see a real breakout fintech company.
Regulation is also one of the biggest inhibitors of small-scale innovation. It’s rare to integrate product development with regulatory compliance, so products are developed with regulatory knowledge and engagement, rather than ticked-off against a regulatory checklist. So much of the output of “innovation” teams, fails to become business-as-usual because it falls at the compliance fence.
Many fintechs fetishise ingenious technology but fail to articulate a proposition that resonates with customers. And older financial institutions are often oriented around (in order): share price, senior executive compensation packages, avoiding fines from regulators, bonus mechanics and, lastly, customers.
Design thinking hasn’t penetrated deeply enough yet. Maybe, even with fintech upstarts, there still isn’t enough choice and switching is too difficult for conservative safety-first customers.
These challenges impede the progress of dusty old stalwarts and hip young fintechs alike. They suggest that the popular narrative — agile, digitally native fintechs unseating the old guard — is too simplistic. That doesn’t mean established banks can kick back and rely on the old rules. But the new kids on the block aren’t certain winners either.