What Silicon Valley Misunderstands About Banking and Fintech

The foundation of banking has changed little over the centuries. What has changed is the way consumers prefer to manage their finances and the ability for organizations to deliver personalized solutions in real-time.

The banking industry goes back ages and has changed surprisingly little over the years. While computerization and, more recently, digitalization, have changed the way transactions are processed and solutions are delivered, the needs of the consumer remain fundamentally the same – help me save and invest, provide me access to funds for larger purchases, and find me ways to make money and reduce costs along the journey.

Despite the lack of major disruption in what the consumer desires, recent innovations have definitely impacted consumer expectations around how and when they want solutions delivered. The transition in consumer’s consumption of banking is most pronounced in the desire for real-time insights into financial portfolios and desire for proactive advice as to what to do financially in the future.

There are some relevant lessons learned about behavioral finance and digital adoption discussed in the book “FinTech Innovation.” One of the most important lessons is the distinction between digital banking winners and laggards over time.

  • Disruptive innovation is ultimately less important than sustaining innovation.
  • Digital is a ‘pull’ technology, while much of financial serves are ‘push’ market places.
  • Platforms win on digital: bundling is more important than unbundling.

Disruptive Innovation vs. Sustaining Innovation

Banking is not facing restructuring due to digital innovation. Instead, the transition is primarily because of the Global Financial Crises (GFC), which has been distilling disruption into financial services through a progressive squeeze of profit margins and the loss of consumer trust.

Financial services organizations faced two alternatives after the GFC earthquake. Organizations can focus on disruptive technology – following the zero price game like robo-advisors. or they can look for sustaining innovation – learning how to grow margins again, becoming more advisory platforms.

Today’s disruptive innovation is often about surfing the trend of banking commoditization, with digital enablements towards pure volume businesses, however fancy and cool. But there is no sustainable value at the end of a zero price game, because the digital winners in this case would become undifferentiated volume shops. In this scenario, large ‘TechFin’ firms would have a competitive advantage and win it all.

Alternatively, the industry could seek sustaining innovation, transforming the business model out of transactions (revenues generated by product placements) into services with packaging of products into a client-centric contextual mechanism where consumers are willing to pay for transparently.

To simplify, more of an Amazon Prime than a McDonald’s business model. This shift from products to services is not relegated to investment management, but is also relevant to small business banking and even high value personal banking. In each case, the financial services marketplace is searching for new sources of revenues by advising clients through their business and personal life cycles with data and advanced analytics across all products and services.

Like flash evaporation, which creates gold during an earthquake, financial services innovation should search for the precious metals which will truly enrich the digital era post GFC disruption. This means attempting a Tesla-like approach, building new “electric” engines to run the banking platform (innovation in finance) and adopt new analytics to guide clients’ experiences (innovation in technology, thus artificial intelligence).

The Distinction Between ‘Push’ and ‘Pull’ Marketplaces

Financial services, including insurance, wealth management, and even traditional financial services are sold more than bought because households have cognitive biases when it comes to money and don’t behave the same as in the consuming world. A fancy user experience is not enough to change a consumer’s behavior by itself.

Digital brings many benefits to streamline the processes in financial services, but front office disintermediation could easily create financial exclusion in the Western world because many households operate in a ‘push’ modality. Only the few self-directed consumers are comfortable enough to ‘pull’ financial products.

This is the reason why the growth of first mover Robo-Advisor solutions were initially very promising but then faltered, while firms like Vanguard and Charles Schwab can still grow fast on digital. They have the ability to optimize marketing costs on their existing client base.

Being a ‘pull’ marketplace means using digital with a purpose, like looking for a specific product on Amazon. However, very few households would google for the next investment fund or business loan. Instead, the majority would ask a friend, a banking organization or an advisor about their recommendations.

Clearly, there is a problem of financial knowledge and education which is the core of the asymmetry of information that has benefited banks’ balance sheets and created an industry which is largely configured as a distribution channel of financial products and not necessarily advice. Consumers are ‘sold’ financial products, but the meta-truth is that many of them ‘buy’ a fiduciary conversation, a comfort zone to make financial decisions.

This is why fintech hybrid models of cooperation (B2B and B2B2C), which merge humans and technology, seem to be a more solid financial services trend than many initially thought. However, this doesn’t mean that ultimately banks cannot go fully digital – because things are starting to shift due to artificial intelligence.

When A.I. will become truly conversational, digital will go from ‘pull’ to ‘push’ and the digital touchpoint could start dominating the human relationship. Proactive AI, contextual engagement and voice will be the new marketing.

Bundling is More Important than Unbundling

Since most consumers have cognitive biases and follow behavioral finance norms, the real value that banking organizations and insurance companies possess and should give back to clients in a transformed financial landscape is knowledge … to help any clients deal with their financial equation.

Earning – Payments = Savings + Investing + Borrowing + Lending + Insuring + Donating + Retiring

The real r-evolution is to learn how to leverage artificial intelligence to digitize knowledge and augment human capabilities to make uneasy decisions along their life cycle, and price it as a service. This is consistent with the idea that financial services organizations should turn into a holistic cognitive platform that allows the rebuilding of lost trust through a fiduciary relationship. Only in this way can organizations transparently forge their decisions about better financial management.

The main lesson learned we can take from the dot.com saga, and the amazing experiences of Chinese TechFin organizations, is that only platforms win on digital in the long term. Facebook is a platform for personal life, LinkedIn for business, Amazon for shopping, Twitter for expressing and sharing … with WeChat being the platform of all platforms.

But, where is the platform for a consumer’s financial life? Becoming a platform with real financial services innovation means an effort to bundle back into a holistic advisory engagement all existing and already broken financial services, out of the chimera of cross selling products, clearly around a centricity which is built on clients’ needs and their data.

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