With the EU’s Second Payment Services Directive (PSD2) and open architecture framework set to come into force next year, regulation may well tip the scales between banks and FinTechs for customer loyalty.
Concessions must be made on both sides along the way, but in the end the collaborators will be the ones to survive – that’s according to an in-depth study released by Temenos.
The report explores one central theme: ‘Symbiosis: Your bank has your trust. Can FinTech make you love it?’ The report, the fourth in a series conducted for Temenos by the Economist Intelligence Unit (EIU), offers a new twist in the ‘tug of love’ story of banks and FinTechs under changing regulatory and compliance rules.
The shape of tech-dominated retail banking is becoming clearer. By 2020 your bank may no longer manage your real-time digital transactions nor your new account opening, but it will still lie at the heart of your financial world.
FinTechs’ dreams of disrupting the entire banking industry may disappoint. Retail banks still hold—and will retain—a huge advantage. They have three “big Cs” on their side: customers, compliance and capital.
The big banks have tens of millions of trusting customers who interact with them every day. Successful FinTechs may have only tens of thousands of customers and few primary banking relationships.
Bankers and their well-established legal teams also have decades of compliance experience. The lawyers always win, no matter what. Crucially, the banks have a cost of capital close to zero. FinTech companies generally have much higher costs because of their capital funding structures. With profits finally
rising, banks can afford to build expensive defences. In that light, the competitive moat seems more like an ocean.
Yet established banks generally still fail to create a good user experience. They have much to learn from the FinTech providers—consumers want service at their fingertips. Today that type of service can be delivered via our smartphones, making it increasingly easy to breach the barriers between distribution and technology.
The solution is simple, on paper at least. Rather than hand-to-hand combat, banks are learning to love FinTech in the hope that it will lead us to love our banks, too. This strategic U-turn by traditional banks has been quick—less than 12 months. However, building a loving, symbiotic relationship may take a little longer.
“The struggle between banks and FinTechs for customer loyalty is not new, however new regulation and technology change is now driving a shift towards collaboration. Banks with a modern core and an open and flexible architecture will be best placed to seize the advantage and thrive,” explains David Arnott, Chief Executive Officer at Temenos.
Renee Friedman, the editor of the report from the Economist Intelligence Unit, adds: “Banks will increasingly have to adapt their culture and digital strategies to their customers’ needs if they are to compete, not expect their customers to bend to theirs.”
The key findings show:
- The regulators will decide. Capital and compliance will shape incumbents and newcomers alike. Banks cite regulation as the most impactful trend in the coming years: bank capital requirement regulation (54%), bank product suitability regulation (53%), product design and transparency regulation (47%); regulatory fines & recompense orders (30%)
- Into the Unknown: American banks worry about regulation the most, despite a promised rollback. European policy direction is more certain yet onerous.
- Resistance is futile. The EU’s Second Payment Directive (PSD2) and open architecture are game changers. Banks may lose their customers’ loyalty, fintech could hit compliance barriers.
- Complacency is not a virtue. Fear of peer-to-peer lenders and robo-advice may have peaked. Non-banks could still steal deposit and lending business – and profit unless banks improve the customer experience.
- No cash, no cheques. If banks are smart, they may still win the war to build truly universal digital networks.
- Banks main concerns on cyber security are lack of system preparedness in the event of a cyber-attack (65%) and the ability to maintain data security (60%)
- The possibilities of blockchain are still not fully understood; 34% think of it only as a tool to reduce financial crime while 34% see its greatest value in increasing the speed and reducing the cost of back office functions
- The majority of bankers surveyed (55%) think that Anti-globalisation movements will negatively affect retail banking by 2020
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