Once an exotic alternative reserved for early adopters and adventurous Millennials, a growing array of fintechs are maturing to provide a serious challenge to established banks and credit unions.
Conventional consumers of all ages — not just Generations Y and Z — now seem willing to give startups launched a decade or less ago a shot at their business. Consumers are attracted by these new offerings thanks to their simplified application processes, familiar experiences and ease of management. Fintechs and Big Techs like Apple, Acorns, Amazon and others are innovating past traditional institutions with digital financial services — including lending, checking, savings, or investing.
That said, established banks and credit unions have not given up the fight. In fact, the rise of fintech challengers has reenergized the innovation agenda of the most revered and traditional institutions, as they seek to remain relevant — and even vibrant — in today’s digital economy.
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Strengths and Weaknesses of Traditionals Versus Fintechs
Fintechs and established players bring their own strengths and weaknesses to the table. To handicap the battle that is shaping up to redefine the financial services options for consumers, I have put together a brief scouting report that assesses the keys to the game that each group should consider to ensure that they come out of the other side with a critical mass of consumers firmly in their corner.
Fintech Strengths. Fintechs have tremendous advantages. Besides their youth — and the media buzz that has for the most part trended positive in their favor — their main strength revolves around the innovations that are closely associated with their brands. They bring a fresh image that has a certain appeal to those consumers who still carry some emotional baggage from the Great Recession, even more than a decade later.
Most fintechs have also benefited from the fact that they tend to focus on providing a focused best of breed service around specific financial offerings. They do not pretend to be a one-stop shop for all financial needs. Consequently they have been able to make inroads with consumers who care about narrow aspects of their financial lives.
Fintech Weaknesses. Their narrow focus, however, is also the source of their biggest vulnerability. J.D. Power research clearly indicates that there are serious concerns from consumers about managing a fragmented set of financial resources.
A significant percentage of consumers — even among Millennials — are not necessarily excited about using different providers to manage deposits, borrow, invest, and plan their retirement. The narrow focus also limits the touchpoints that lead to the development of trusted relationships. This is a challenge exacerbated by most fintechs’ choice to limit their interactions with consumers to digital channels.
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Traditional Banking Institution Strengths. Established banks and credit unions operate with an entirely different set of dynamics. These players tend to have very strong existing relationships that have been in place for years, if not decades. And if possession is nine-tenths of the law, established players still retain the lion’s share of consumer accounts across the spectrum of financial services.
Unlike fintechs, traditional banks can still leverage the convenience of in-person touchpoints at branch offices to solidify relationships with clients — even as they build out their digital strategies. Indeed, there is a “sticky” correlation between the number of services that institutions offer any given consumer, and that consumer’s reticence to move their financial business elsewhere.
It is important to note that the big national banks — and to a proportionately lesser extent, large regional institutions — have capital to invest in their own digital transformation initiatives. Many are tapping into these resources to better position themselves in this new digital era by investing in emerging technologies — such as mobility, artificial intelligence, machine learning, and big data analytics — to develop a deeper and broader understanding of what each client really wants from solutions that address the different segments of their financial lives.
Traditional Banking Institution Weaknesses. While established players are neither down nor out in the fight for consumer loyalty, they do have challenges that need to be addressed fairly urgently.
The number one challenge that we see emerge in J.D. Power consumer surveys is that traditional financial institutions still have significant work to do to repair consumer trust damaged during the last recession. It is a trauma that still manifests itself across consumers who experienced significant losses and disruptions to their financial lives. As a result, many traditional brands in financial services still have a stubborn, negative perception problem.
The second challenge that traditional banks and lenders must address concerns improving consumers’ digital experience. While financial resources are being allocated to create new digital offerings, many of these initiatives are not well integrated with their more established call center or brick-and-mortar operations, creating frustrations that make for a “fickle” customer base.
The complexity of existing systems — built on generations of difficult-to-integrate legacy technologies — combined with an incumbent culture that may not be optimized for today’s digital marketplace, is acting as a barrier to the kind of progress that many consumers expect from their financial services providers.
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Likely Survivors from Both Camps Share Characteristics
Looking ahead, it seems clear that leading players in each of these segments have opportunities to survive and thrive over the next few years. The future does not belong to any single category. However, those who remain standing will have exploited their strengths and minimized their weaknesses by keeping a careful ear out for the voice of the customer and a sharp focus on constantly evolving customer experience imperatives.