Financial technology companies have shaken up traditional consumer banking in the past few years. High fees, poor customer service, and overly complex products in many parts of the industry have provided multiple openings for innovative “fintech” startups to win over customers with simple, low-fee, mobile-first products and services.
But legacy banks aren’t taking that challenge sitting down. They’re responding — sometimes by extending an olive branch to the startups, sometimes by flexing their considerable financial muscles in the marketplace.
At the recent MIT Sloan Fintech 2019 conference, leaders from both startups and established legacy banks shared insight about customer experience, data, and the future of banking. On one point they were in total agreement — the disruption in the banking industry shows no signs of slowing down.
Fintechs focus on customer service
Challenger banks have multiple fronts on which to wage war against incumbents, particularly in the realm of customer experience.
The historical banking experience of long lines, reams of paperwork, and complicated products has been an easy target for startups. After all, it’s a difficult ask to get millennials hooked on Venmo and ApplePay to schedule an appointment at their neighborhood brick and mortar bank to set up a checking account.“Growth for us really comes from [delivering] a delightful client experience,” said Brandon Krieg, founder and CEO of Stash, a mobile banking and investing platform. “In the U.S., the bar is so low.”
Nicolas Kopp, the U.S. CEO of N26, a German online bank just this year establishing a beachhead in the United States, said it’s most important to “keep financial services as simple as possible for your customers. The long-term vision is not just to replicate a traditional incumbent bank today,” it’s to make better products that are easier to use and understand.
Kopp described how N26 uses machine learning and data mining to “provide certain products only to a select group of people. We can filter out in the background people for whom maybe a savings product is not relevant because they don't have any money to save.”
Fintechs are likewise leveraging technology to offer customers additional products that fit their needs in the moment. Dan Westgarth, the U.S. CEO of the digital bank Revolut, which specializes in global fee-free spending, said, “If a customer enters an airport geolocation, we might offer them travel insurance. Similarly, if they break their phone and change SIM cards, we can push them mobile [phone] insurance.”
Fintech banks position themselves as being less fee-heavy than their brick-and-mortar brethren. With little or no physical branch overhead, they can operate at much lower levels of revenue per customer and use a low-fee approach to attract and retain new customers.
Krieg, who said the average traditional banking customer pays $370 a year in fees alone, dropped Stash’s minimum account balance to $5 to bring new customers onto the firm’s investment platform. With a digital model, he sees ample room to be profitable, but still reduce costs for customers.
That said, for fintech banks the path to success in the United States is still uphill. In their short history, challenger banks have been more successful getting off the ground in Europe than in the U.S. “There are more than 100 players now in Europe, where there are much fewer in the U.S.,” Westgarth observed.
Panelists agreed that the UK and European regulatory environment is simply more friendly for new operators. As challenger banks move more forcefully into the United States, increased bank regulation will be an additional hurdle for them to overcome, they predicted.
Big banks battle back
Needless to say, incumbent banks are well aware of the threat from startups. Leaders in financial innovation at Goldman Sachs, JPMorgan Chase, and Barclays described a multipronged approach to the rise of fintechs: partnering, innovating internally, and capitalizing on the many advantages of incumbency.
Formerly, large banks would either develop new technology themselves or simply buy innovation they were interested in. “Traditionally, it’s been ‘build or buy.’ Partnering is sort of a new flavor,” said Dan Packham, innovation officer and head of U.S. Fintech at Barclays.
Partnering allows legacy banks to get a look at new technology without the requirement of a large monetary investment. Such partnerships might take the form of offering informal advice, providing office space in which to work, or sharing access to data.
Partnership “means a lot more than just providing capital,” said Daniel Drummer, global lead for data analytics at JPMorgan Chase’s Digital Strategy & Fintech group. “It means providing advice, sometimes even space inside the bank.” The results might ultimately be the outright purchase of the startup, a significant ownership stake and seat on the board, or the legacy bank simply becoming an important client of the fintech.
The best legacy banks tend to be populated with smart, motivated employees. Tanya Baker, global head of GS Accelerate at Goldman Sachs, sees this talent pool as an underutilized asset. So in 2018, Goldman approached its 37,000 employees worldwide and said, “If you have a business idea, submit it,” Baker said. They received more than 1,000 new tech business proposals, and after multiple rounds of “Shark Tank”-style presentations, ended up funding eight of these internal proposals.
According to Baker, when it comes to innovation, one of the biggest challenges for large legacy banks is “getting something done that’s slightly more creative and crosses over existing business lines and doesn’t obviously fit in one area.”
Goldman’s answer to this challenge was to create a division called GS Accelerate with the ability to operate across divisions and geographies. JPMorgan’s Digital Strategy Group and Barclays Rise platform operate in a similar way, with a goal of incubating innovation internally.
“I don’t think we’re short of innovative ideas within the firm, it’s that people maybe didn't have a good way to process those ideas within our business,” Packham said. “Now we're pulling it all together so we can get [those ideas] into the right forums and talk about them. And either seed them with time, or money, or whatever they need in order to explore a little further.”
- Working the incumbent advantage
When it comes to pushing back against challengers, being a large bank isn’t small potatoes. “We have scale, we have a trillion-dollar balance sheet, and we have brand,” Goldman Sachs’ Baker summed up.
Legacy banks also have access to significant amounts of existing customer data, which, used thoughtfully, can deliver enormous competitive advantage.
Drummer said JPMorgan has 20 more years of “historic data, which especially when you talk about artificial intelligence data analytics, is really a big and critical asset that many startups don’t have.”
Baker agreed. “As we evolve and invest in and digitize a lot of our analog processes, we’re finding that all of a sudden we can collect data on areas of our businesses that we didn't previously have. And once you can collect the data, you can overlay an analysis on it, and just learn more and continue to evolve.”
Evolving the industry
The biggest threat to legacy banks may not be fintech, it may be the banks themselves. Incumbents have both financial and intellectual capital, but can get tripped up by the need for consensus.
“What’s great about a startup is that if you have two people in a garage, and they’re trying to figure it out, no one’s going to tell them that it’s wrong,” Baker said. Large banks, in contrast, “make it so hard to get things through the system. If you have to get so many people to approve or buy [your idea], you’re not really going to innovate.”
When innovative digital platforms do get development within legacy banks, they can face multiple challenges: existing clients who might need appeasing, regulators they must abide by, and senior management they have to win over.
It is not yet clear who wins the future of fintech. Startups are creative, nimble, and customer-driven, while legacy banks have balance sheets, armies of MBAs, and decades of customer data to mine. In the end, panelists seemed most energized by the partnership model.
As Baker put it, Goldman Sachs is finding “more and more really great opportunities to work and partner together [with startups], and lock arms in evolving the industry.”