With all of the recent discussion about the disruption of the banking industry by FinTech start-ups, it may be the right time to discuss the differences between FinTech start-ups and incumbent banks. From a very basic level, the digital disruptors are usually associated with mobile functionality, simplicity, big data, accessibility, agility, cloud computing, contextuality, personalization and convenience.
Alternatively, with the exception of convenience (from a physical location perspective), most traditional banks have few of these qualities, but instead are associated with trust and security, significant capitalization and customer indifference.
But, what do industry leaders think? What is the biggest difference between FinTech start-ups and incumbent Banks?
Chris Skinner, Chairman of the Financial Services Club and author of ten books including the bestseller, Digital Bank.
“Startups have no existing structure to change so they can change everything. The challenge is how to convince customers to change though. Incumbents have millions of onboarded clients and so to change anything takes time. Most have the time though as customers are slow to change. Fundamentally though both are facing two very different challenges – FinTechs are creating while the incumbents are converting.”
Brett King, CEO and co-founder of Moven, bestselling author and Breaking Banks radio show host (@brettking)
“The answer is relatively simple … inertia. Startups have zero process or organizational inertia to circumvent. Alternatively, most legacy banks have an over abundance of both.”
Jim Marous, Owner and Publisher of the Digital Banking Report and Co-Publisher of The Financial Brand (@JimMarous)
“The biggest difference is the overarching culture of innovation and the organizational structure. Instead of silos and the need to defend turf, FinTechs have flatter organizational structures with fewer barriers to change. This structure encourages not only innovation, but the ability to tear down and rebuild.”
Jason Bates, Co-founder at Mondo Bank (@JasonBates)
“The world has started to dramatically change and banks are fighting to ‘protect’ their established business, to turn the oil tanker, to find new relevance and a new fit. Start-ups are natives of this new world, and are fighting to achieve scale. Can legacy banks find the speed, agility and new business model faster than FinTech can find scale? Legacy infrastructure, entrenched culture, and a disengaged workforce make that very difficult.”
Alex Jimenez, SVP of Digital and Payments Innovation at Rockland Trust (@RAlexJimenez)
“The biggest difference between legacy banks and FinTech firms is that banks focus on the management of risk and FinTech focus on managing the overarching customers experience.”
Bradley Leimer, Head of Innovation, Santander Bank, N.A (@leimer)
“Scale and trust are the most significant differentiators between the types of organizations. Incumbents have it and protect it. FinTech disruptors have to hustle and differentiate to achieve either. Both are critical.”
Sam Maule – Emerging Payments Practice Lead at Carlisle & Gallagher Consulting Group, Inc (@sammaule)
“FinTech has the ability and opportunity to think narrow and deep. The advantage is to be able to focus on singular use case solutions. Alternatively, legacy banks have to think across product lines and with silos … which is tough.”
Richard Brown, Executive Architect for Banking and Financial Markets at IBM (@gendal)
“Banks have an asymmetric risk profile for innovation. FinTech firms have a limited downside (close, try again), whereas banks have a severe potential downside (reputation, operations, etc)”
Stewart Bromley, Director of People and Customer Experience at Atom Bank UK (@atom_stewartb)
“Freedom, pace, energy, adaptability and flexibility, customer-centricity are all words that quickly come to mind with FinTech firms. I think the incumbents are shackled by governance, talent, technology, organization and focus on risk. All of this makes innovation ‘too difficult’“
Anne Boden, CEO of Starling Bank UK (@AnneBoden)
“The common theme for FinTech companies in that they fully embrace the concept that technologies in every day use in other industries can be used in banking without compromising the strict and rigorous demands of a highly regulated industry. The difference is more a question of whether a bank embraces FinTech. Is it part of the sector itself, such as Starling Bank … does it gain energy from FinTech such as Barclays with TechStars … or is it going to miss the boat (I will be kind and not name the firms)?”
Duena Blomstrom – Independent Digital Consultant at Blomstrom.com (@DuenaBlomstrom)
“Size really does matter. The bigger the organization, the harder it is to remember one’s dreams, knowledge and common sense. Banks and FinTech both know what’s right from a technology perspective and from a customer experience perspective, but only Fintech firms can keep their religion and execute. It takes having big, bold visionaries to keep banks competing given their size, so auditions for ‘This Banks’ next set of Big Balls’ should always keep rolling.”
While each of the above diverse points of view have merit, all point to an overarching conclusion.
The most significant difference between FinTech start-ups and the incumbent banks is the purposefulness of their people. In other words, each and every person within a Fintech start-up has a singular purpose for being there. They all must be on the same train, with nobody there simply as a passenger. There is no place to hide. There are no legacy stipulations to guide the process or hinder achievement.
When a start-up is created with a singular purpose, or have identified a particular gap in the marketplace, the team can only be comprised of individuals who have the same vision and who can add significant value to that endeavor. When lead times are tight and profits are small, every person on the payroll plays the role of a director or shareholder and must add value to the company … daily.
This is the starkest difference between the current incumbent banks and the new breed of start-ups. Within legacy banks, we see scores of assets (both human and otherwise) accumulated over time that add little incremental value. In fact, a significant portion of these assets may actually be a drain on productivity, innovation, corporate energy/enthusiasm and profitability.
Can Banks Get Their Mojo Back?
Many of the least productive people are not restricted to unimportant positions. Many have been at these organizations for a significant length of time and are now ‘batteries without a charge’.
So, the questions becomes, ‘can legacy banking organizations make the significant changes required in the number, structure and motivation of their employees’? In start-ups that have matured into larger firms, we see them making bold moves to prune based on the changing marketplace or objectives of the company.
Good examples in recent times are people like PayNearMe, who laid off one-third of its employees when it decided to focus on it’s business-to-consumer efforts. We have seen similar changes to companies like PayPal recently also.
This is a global epidemic in the workforce of banks, with no simple fix. Some global players have made bold steps, such as Commonwealth Bank of Australia under the leadership of now Barclays CTO Michael Harte.
Not being able determine the best way to make cuts or accelerate the change that they wanted, Commonwealth Bank took the bold step to move 1,500 of its IT staff outside of the company into EDS who has subsequently been bought by HP. This brought meaningful change to the direction of their efforts and, more importantly, to the purpose of each of the people involved.
Outsourcing may not be the answer for many legacy banks, but the industry needs to make these type of bold moves to move the needle and embark on the level of transformation needed in the digital age. Unless bold moves are taken throughout global banking industry we will continue to see more of the same; billions spent, underwhelming delivery, and increasing frustration of the ‘Disenfranchised”, ‘Outsiders’ and ‘Eager Beavers’ referenced in my previous article.
The difference between today and the last 5 decades in the banking industry is that the industry can no longer ignore the ‘fintech barbarians at the gate.’ It is time to rise up to the new challenges and challengers. The time to act is definitely now.