7 characteristics of a “supporting industry”

What happens when you bring together financial experts at a technology event, organized by analytics software supplier SAS, with the surprising name ‘Curiosity Forum’? You get interesting cases of cross-pollination, a sharp insight in a rapidly changing market, and surprising statements. An overview of the most important findings.

1. “The banking sector is not a closed sector in itself, it must ensure that other sectors thrive.”
This surprising statement was made by Fabian Vandenreydt – himself raised at financial companies such as Swift, Capco and JP Morgan, and now leading the fintech ecosystem B-Hive – to downplay and emphasize the importance of the financial sector at the same time. “The financial sector doesn’t produce, it is only an engine that helps others to realize their objectives, both private and business. In a changing market it is therefore important to remain relevant as a financial service provider.”

2. Digitize or die
Staying relevant is very difficult in a rapidly changing society. Particularly when the market is saturated. According to Vandenreydt this is certainly the case in Europe: “We have an oversupply of medium-sized banks that still do business in a very traditional way. For them, digitization will prove to be a catalyst: unless they manage to digitize their services sufficiently or find a unique value proposition, their days are numbered.”

3. “Size does matter”
No matter how challenging digitization may be for smaller banks, the larger banks should not fear for their future immediately. "Even with savings rates that are a couple of percentage points lower than challenger banks, traditional banks have a substantial customer base. For example, JP Morgan's deposit base is $1.5, trillion USD vs. USD 180 billion for Ally Bank, primarily driven by baby boomers' trust in traditional banks” says Anand Chockalingam, who served at three global banks, HSBC, JP Morgan Chase and as Senior Vice President, Decision Sciences at Citigroup and now Senior Director at SAS Financial Customer Advisory Services.

The preferences among the younger generation, however, are going in the other direction selecting a digital-first platform for all of their services, especially financial services, Chockalingam warns. The question is, can the banks innovate faster than the challengers can grow their customer base. Most of the banks are responding with transformations through the acquisition of Fintechs, or partnerships or creating their digital-only service.

4. Fintech and traditional banks want what the other has
“Traditional banks understand this and are looking for ways to catch up with their digital arrears on fintechs”, says Vandenreydt. Because they are responding to the needs of the customer by digitizing their services, but also because this allows them to significantly reduce operating costs. Yet there are other figures traditional banks look at with sadness:

  • Traditional banks take three days to activate a new customer account, fintechs do this within 24 hours.
  • Traditional banks calculate 3 to 6 months for the launch of a new function, while fintechs succeed within two weeks.
  • 25% of employees of traditional banks give their employer a 5-star rating, with fintechs this rises to 68%.

The only thing traditional banks can set against this is size and (partly as a result of this) reliability and trust, though this is a very important asset. Yet we see both parties gradually coming together. Large banks are looking for fintech take-over opportunities or create their own start-up that can act quickly and flexibly. Fintechs are considering take-overs with one important target: to increase their size in order to gain more confidence. This constantly leads to new partnerships and acquisitions. This continuous movement will not slow down in the next few years.

5. Competitors on the horizon
Perhaps the most important drivers for adoption of digitization are the inherent abilities of digital-first platforms to leverage real-time data to personalize at scale while lowering the costs of operations. “For example, Alibaba and Amazon saw data on their platform that by simply extending payments services to consumers and credit services to merchants, they would fuel growth. And oh by the way, they are now a threat to traditional banks, just as they were to retailers not long ago, for the same reasons, namely reach without the overheads of storefronts and the on-demand convenience for consumers”, concludes Chockalingam.

And it doesn’t stop there: Google, Facebook, and Apple are also extending their mobile platforms to offer financial services just like the Fintech startups.

6. Data play a central role
Simple lending also means fast decision processes. Online systems, especially when requested by mobile devices, must be able to decide in no time whether they want to grant a customer credit. Given their limited legacy, this is a lot easier for FinTechs than for traditional banks that often still struggle to centralize and harmonize the many historical data. But even companies such as Google and Apple and (still relatively young) e-tailors like Amazon and Alibaba are much more data-oriented from the start. Reliable analytics, which help lenders to make the right decisions in an instant, will make the difference. As Vandermyde puts it: “If data are the new oil, then analytics must be the new refineries.”

7. Will the government stifle innovation in the sector
The typical image of the bulky traditional bank having difficulty with the speed and flexibility of Fintechs and tech giants is real. The reality is also that the regulations monitoring the financial sector have evolved over hundreds of years while regulators are still figuring out Fintech start-ups and technology giants who have innovated faster unbridled by law.

Chockalingam notes: “Europe tilts towards regulating first. In Asia, they work the other way around, like China just introduced new regulations to rein in shadow money creation by domestic Fintechs like Alipay and WeChat after a rapid run-up to almost a billion customers each, and the US is somewhere in the middle. Demographic shifts, technology adoption, and mobility will redefine the sector, and the regulators will adapt to bring digital assets and Fintechs under supervision, but challengers face the uncertainty of regulation as they move big into the financial sector.”