How Banks Can Out-Innovate Startups and Tech Firms

Rather than tremble at the potential threat that fintech startups and banking disruptors represent, retail financial institutions can rip pages out of the innovation playbook those very firms wrote.

Banks that don’t start adjusting their strategies are on the verge of disruption by startups and high-growth tech firms. (Any financial institution that hasn’t already heeded this word of caution hasn’t been paying attention.) These scrappy companies are slowly chipping away at market share from banks and traditional lending players.

For example, Square enabled small businesses to easily accept payments, building a large merchant processing business that processed around $10 billion in 2014. Lending Club and Prosper have successfully leveraged crowdsourcing to build an alternative peer-to-peer lending model, raising more than $4 billion and $1 billion in loans respectively. Kickstarter got three million people to pledge a total of $480 million for projects in 2013. That’s half a billion dollars that did not come through traditional bank lending channels. There are rumors that Amazon may enter the lending business, and Facebook is preparing to move into the international money remittance space. The list goes on.

But banks can respond to competitive threats by learning from and adopting best practices from the same firms that are challenging their very existence. How should banks approach product strategy? Or the adoption of new technologies? Launching an “innovation program” or investing several million dollars in emerging startups may not be the best answer.

( Read More: Peek Inside 7 of The Coolest Innovation Labs in Banking )

Here are four approaches that banks can take to out-innovate startups and high-growth tech firms:

1. Drive to Digital. Adopt a digital-first approach to products and software in order to connect with consumers anywhere, anytime and at any place. It’s not just about mobile anymore. Rather, it’s about technology-enabled digital screens of all form factors such as: tablets, phablets, wearables, smart TVs, connected cars, etc. It’s important to plan early and build tools and infrastructure that capture customer data via these digital devices to learn about consumer behavior, and to deliver and cross-sell relevant financial products.

2. Platform-as-a-Service. Consider a platform-as-a-service approach to products to reduce development times and build new services in a rapid and nimble fashion just like a startup. The Serve platform, a prepaid service from American Express, is built on the same concept, enabling the bank to deploy a range of different flavors of prepaid services in a rapid manner. The approach also enables the bank to offer co-branded prepaid cards to retailers and other customers meeting individual needs without having to build new, separate products.

3. Customer Experience. Continually enhancing the customer experience is now table stakes. No matter what the product — credit cards, loans, checking accounts — it has to cater to increased consumer expectations. That means simplicity and convenience. Products have to be easy to acquire, easy to use, and must work all the time. If they don’t meet consumer expectations, people will become quickly frustrated with the experience and leave for competing products.

4. Regulations and Compliance as a Competitive Advantage. This is an area where banks have the most advantage. Regulation and compliance — while no doubt challenging — is a weapon banks can use against startups and tech firms to retain control of both customers and market share. In a recent interview, Square’s co-founder claimed it took the company only three months to build their product but 18 months to get it launched specifically due to regulatory challenges. Banks already have the assets, tools, processes, and relationships with regulators in place, and these can be leveraged in ways that enable them to get products to market faster.

Banks will have to think about stickiness and network effects as they encourage their customers to stay loyal for the long-term. Adopting practical approaches to product strategy, technology adoption, and by reducing product development times, banks stand the best chance to out-innovate startups and tech firms.

This article was originally published on . All content © 2019 by The Financial Brand and may not be reproduced by any means without permission.