Fintech Endgame: Superheroes or Villains?

By Daniel Dent, Retail Banking Executive, Capital Bank

By Daniel Dent, Retail Banking Executive, Capital Bank

The Marvel superhero movie arc beginning over a decade ago consisting of 22 movies has culminated in “Avengers: Endgame” that surpassed $2 billion (as of this writing) in record time. As with any superhero movie, there must be heroes and villains.

In the banking industry, this conflict is often seen in traditional banks versus fintech and your physical or virtual street corner probably dictates your take on this tension.

On one hand, most traditional banks are slow moving and not as technologically savvy, but provide trust, stability, and safety. On the other hand, fintech companies and digital banks have no physical presence, but do provide convenience, significantly faster iteration, and low fees.

" Prioritization to integrate physical networks and digital capabilities for a seamless alignment of UI, UX, and CX should be considered "

Regardless of your stance, consumers are in the driver’s seat and change is happening faster than we perceive. Customer preferences, digital banks, and non-bank disruptors are forcing a pace of change in an industry that has historically plodded along. Traditional brick and mortar banks must strike a careful balance to retain existing customers while acquiring new customers that fundamentally value convenience differently.

Banks have long been in charge of how customers connect, communicate, and transact business. Existing mature bank customers find value in branch usage with digital capabilities being a strong supplement. Younger consumers do not place the same value on the physical network and look to digital capabilities as a primary decision point. According to Novantas’ Customer Knowledge U.S. Shopper Survey (Figure 5), convenience drivers shiftedaway from branch-centric factors by 12 percent from 2014 to 2018.

Many regional and community banks face this dilemma. Banks with large branch systems and mature customer bases, but with minimal digital capabilities and footprints, face uphill battles to acquire new households. While they might have low attrition, they also have low new-to-bank growth rates. Brick and mortar banks need data andan understanding of how the consumer wants to interact.

The proliferation of mobile devices is dramatically alteringhow consumers view and interact with the financial service industry, and their preferences are changing based on experiences with other mobile and online companies. Today, customers increasingly expect digital platforms similar to those of Amazon and Netflixand less on the offerings of a banking competitor across the street.

With easy access to data, free information flow, and abundant competition, consumers are able to make decisions that are far more informed and faster. These same factors have also turned bank products into commodities.

Due to the commoditization of products and antiquated banking systems, disrupters are seizing opportunities to chip away or even cause a landslide in market share as younger and more diverse customers search outfinancial service providers. New digital banks and startups have the advantage of building from scratch and targeting this new mobile first consumer. The samestudy from Novantas (Figure 2B) shows that customers are also willing to consider non-bank technology companies as viable alternatives to traditional banks.

While frequent online shoppers and Millennials are the most likely groups to open checking accounts with technology companies, 55 percent of Gen X and 32 percent of Baby Boomers are also open to the idea. This poses an increased attrition risk for traditional brick and mortar banks if their customers look for other avenues due to lack of mobile capabilities, high fees, issues related tomergers, or other pain points.

Large tech companies are in a unique position given their capabilities, expertise, and funding. Apple, Google, Facebook, and Amazon all have a long-term and loyal established customer base and tapping into a small portion of this foundation could significantly erode revenue streams from traditional banks.

Relative newcomers Chime and Moven have strong mobile-first designswith 5-star ratings in the Apple App Store. Compare this to App store ratings and comments forregional and smaller bank apps and there is a stark contrast. Consumers’ perception of convenience continues to move toward mobile and away from brick and mortar. Venmo, a peer-to-peer payments app now owned by PayPal, had $19 billion in transactions in 4Q18 and 17 percent YOY user growth (including PYPL). The popularity of Square also reflects this trend where Square had >100 percent YOY user growth.

The staggering number of fintech startups and their ability to rethink how we deposit, save, lend, and make payments in the new world should cause all brick and mortar bank executives to consider their own prioritization and ask the following questions:

 • Are white label services differentiatedor simply table stakes in this environment?
 • What is the correct pace of change for our institution?
 • How do we pay for these technology investments?
 • What is the best use of our physical network?
 • Do we have access to the technological expertise needed?

With all of the potential variables, brick and mortar banks have to negotiate the complex tradeoffs between current needs and future investments to acquire new customers. The ability to outspend a well-funded VC supported startup and have the technical expertise is out of reach for most banks. Prioritizationto integrate physical networks and digital capabilities for a seamless alignment of UI, UX, and CX should be considered.

In addition, transforming the branch from a large square footage service and transaction behemoth, to a smaller, more nimble, and proactive advice-driven channel are important factors for the future.

So, are brick and mortar banks or fintechs the villains of our story?

Neither, because both will have to adapt and iterate quickly to ensure they are meeting consumer needs when, where, and how consumers want. There is enough space for both to thrive and form partnerships.

However, traditional banks have to contend with the cost of new technology and accelerated change. Fintechs face an established, safe banking system, and an unfamiliar regulatory environment.

One thing isfor certain, fintech is inevitable…


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