As emerging fintech firms continue to thrive in the world of finance, it’s clear that traditional banking has been caught flat-footed by the pace of digital acceleration within finance.

This trend has exploded in the wake of the pandemic, which has forced countless customers to embrace digital banking.

Now, as fintech continues to make its presence felt across the industry, is there anything banks can do to keep up? 

As customers continue to embrace fintech solutions, they’ll grow to expect similar levels of agility and innovation from their traditional bank as the latest fintech startup they’ve used. 

As the data above shows, the pandemic caused a significant shift in the banking habits of customers. While as much as 34 per cent of customers embraced mobile financial apps, both ATM and banking branch usage fell 5 per cent and 12 per cent, respectively.

The decline of ATM services illustrates the sheer pace at which COVID-19 has accelerated a global push towards a cashless society. 

So what does this all mean for banks? The digitalisation of the industry points to further growth within financial technology, but can traditional banks ever outpace their fintech counterparts when it comes to innovation?

Let’s take a look at five important challenges that traditional banks must overcome as a means of staying competitive amidst high volumes of emerging competitors. 

Better understand fintech disruption

The first and most significant challenge facing traditional banking institutions involves gaining a more comprehensive understanding of how fintech disruption occurs across the industry.

When discussing banks’ struggles in the face of emerging fintech, Kamal Munir, Associate Professor of Strategy and Policy at Cambridge Judge Business School, and Hamza Mudassir, Visiting Fellow in Strategy at Cambridge Judge Business School, indicated that complacency may be a stumbling block for banks. 

Munir and Mudassir point to Cathy Bessant, Bank of America’s CTO, and her comments on Apple’s announcement of a new credit card. “My reaction when I saw the announcement was, first competitively, all of the features that are in that card are offerings we have today,” Bessant said of the new service. 

However, in releasing competitor products, fintech firms are changing what banking means to people and are expanding their options in which customers can engage in finance. 

Rather than the product itself, the shift towards fintech is enabling a transition from product-focused to a more platform-based competition.

It’s imperative that institutions quickly realise that goalposts are being moved in the industry – and to ensure the best chance of survival, banks must understand where these new battlefields are and how best to develop services and products that place the customer at the heart of their operations. 

Tackle the challenge of digital acceleration head-on

Another critical challenge comes in implementing new technology whilst safely transitioning away from old legacy systems that have existed for many decades.

Typically, as companies grow, so too does the number of systems they use– creating issues with scaling.

Also read: Neobanks: the future of banking?

Much like moving a house without hurting its foundations, banks need to take the essential but painful step of replacing their legacy systems. 

However, there are plenty of options available for banks to look at when implementing new technology. Firstly, it’s possible to launch front-end applications for customers.

This can help to deliver a simple, user-friendly interface that can help to keep banks relevant in a market that’s come to demand convenience.

Although it’s also important to note that this change can only be considered quick-fix whilst heavy-duty back-end changes rumble on in the background. 

Another choice is for banks to create a dedicated team designed to maintain legacy systems while another creates a whole new system entirely. Both teams would work together in carefully crafting tailor-made solutions to overhaul the operations of the business.

Building omnipresence

The end goal of traditional banks aiming to adapt their products to keep up with the growth of fintech is to become an omnipresent service.

Leading banks must turn to technology and big data to learn to insert the right financial services at their customer’s moment of need. 

Distribution models have been developed to use better marketplaces and technologies like open APIs and 5G to connect finance better with homes, machinery, vehicles and other devices.

Although this can be a challenge for banks due to a lack of visibility accompanying these services, they represent a necessary step towards delivering the scale of convenience that wins the long-term custom of users.

Embracing collaborative equity investing in fintech startups

Many traditional banks have looked to modernisation in the form of investing in fintech. 63 per cent of financial service providers have set up accelerators or startup venture funds.

In the US, banks have invested as much as US$3.6 billion in 56 different fintech startups.

Whilst just 7 per cent of banks have taken on the challenge of setting up their fintech R&D to create in-house solutions. 

While this at least demonstrates an awareness of the potential of fintech, finance expert and Toptal author Alex Graham believes that taking equity stakes in fintech startups should be a more collaborative exercise for banks.

Also read: Why neobanks are better than digital banks

Instead of investing in acquiring the startup later down the line, banks should instead open up their client roster for the fintech they buy into– helping the bank to offer a value differentiator to their clients whilst internally exploring what innovation looks like in practice. 

This could offer more excellent value to clients in the shorter term. Particularly with the emergence of startups that provide blockchain-based features like smart contracts or those that have the power to leverage frictionless cross-border payments.

In the case of emerging fintechs like Connectum, banks can embrace the startup’s multi-currency processing, borderless one-click payments and AI-based security system, all of which can instantly offer clients a more comprehensive level of service. 

Take fintech seriously

Most importantly, it’s time for traditional banks to take fintech seriously. The fintech gold rush is well and truly taking off in 2021, and institutions that fail to move will lose their place in the market. 

As the data above shows, the volume of fintech IPOs has grown exponentially since the emergence of the COVID-19 pandemic.

Now, as 18-months of social distancing and lockdown measures accelerate our transition towards a cashless, more digitalised financial ecosystem, the emphasis is on banks to modernise their services or risk becoming overwhelmed by the sheer growth of an industry that appears to be unstoppable at present. 

In choosing to embrace the growth of fintech rather than ignore it, traditional banks can work quicker to modernise their services and continue to win customs as the industry faces sweeping changes.

By embracing the change, the market leaders of yesteryear can thrive long into the future.

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