On Oct. 4, 2010, I walked into the Metropolitan Pavilion, an event space in New York City, for what came to be my introduction to fintech. It was an early edition of a leading fintech conference and at the time I was working for a bank. The conference featured 56 companies ranging from upstarts like Betterment, CreditSesame and BackBase to established brands like H&R Block, Jack Henry and FIS.
For me, a working banker, the remarkable thing about attending the conference was the feeling that the banking industry was about to be hit with an innovation tsunami. Would we be able to stand up after the blast?
The consensus from the people I talked to at the conference and elsewhere was that fintech firms were not only bringing innovation to banking, but that they would be replacing banks in a few years. Fast forward to 2023 and the talk at fintech conferences is much more about partnerships.
Banks and fintech firms alike now realize that the best course of action for both is to work together and learn from each other. Fintech founders have realized that banking is hard. Regulation, security and risk management aren’t obstacles that can be ignored and easily addressed with more technology. In the meantime, bank and credit union leaders now recognize that innovation doesn’t happen by simply hiring away people from fintech firms to come to the bank — nor by putting in ping pong and foosball tables in the break room.
Overall, banking has learned valuable lessons from fintech companies. Here are nine of them.
1. The Essential Need to Adopt — and Continue — Digital Transformation
Fintech’s success at capturing the public’s attention highlighted the importance of embracing digital technology. Many traditional banking institutions continue to pursue a redefinition of their business models leveraging digital technologies including mobility, cloud computing, application programming interfaces (APIs), big data, social media, artificial intelligence and machine learning. More recently newer AI modalities like large language models (LLMs) and natural language processing (NLP) are revamping the industry’s concepts of marketing, communication and analysis.
2. Why a Customer-Centric Approach Is Critical for the Future
Fintech firms prioritize user experience and customer convenience. This approach has forced traditional banks and credit unions to face their shortcomings in understanding their customers and how they interact with the institutions.
While many financial institutions felt that they were already prioritizing customers, fintech showed that banking customers’ expectations have changed as adoption of consumer technologies like smartphones continues to grow.
3. Why People-Centric Design Plays a Major Role in Banking Transformation
With a modern understanding of customer needs, fintech approached solving customer problems using methodologies like design thinking and jobs-to-be-done (JTBD). These methodologies have been adopted by many leading edge banking institutions, helping them to approach their customers as individuals and not as demographic segments.
4. The Importance of Innovation and Agility to Banking’s Future
Fintech firms have embraced the speed of the internet, which means rapid innovation. Leading financial institutions have recognized the need to adapt quickly to market changes and have taken steps such as establishing innovation labs, innovation practices, and partnerships with fintech companies.
5. How Personalization Improves Customers’ Banking Experience
As customer-centric organizations, fintech firms leverage data and AI to provide highly personalized financial services. Banks and credit unions can copy this approach and even surpass it by the mere abundance of customer data they possess. To provide personalization, traditional players need to get their data house in order first. The result is the use of integrated data analytics to offer tailored recommendations and products.
6. Catching Up on Fintechs’ Cost Efficiencies
Because fintech firms don’t rely on legacy processes and technology, they often operate with lower overhead costs. To compete, banks should focus on cost reduction, optimizing operations and streamlining processes through modernizing and digitizing their tech stack.
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7. Modernizing Banks’ Technology (Already)
Most banking executives would point to technology as the defining difference between fintech firms and banks. Many additional differences exist, but it’s true that new companies with modern technology are tooled for the present and the future, while many banks and credit unions remain saddled with old technology, including core systems from the 1970s and 1980s. Modernizing their tech stack, as mentioned above, drives efficiencies to match fintech firms’ stacks.
8. Putting Regulatory Compliance Right on the Innovation Spot
Hard experience has shown banks and credit unions the importance of ensuring that their services comply with financial regulations, while fintech startups have had to learn that lesson, sometimes the hard way.
However, some fintech firms have addressed this challenge by working in novel ways, which many traditional banks haven’t tried. Such approaches include having their own compliance team involved in their innovations, as early as ideation, and working closely with regulators before a single line of code is written.
9. Stressing Collaboration Instead of Vendor Management
Rather than viewing fintech firms as strict competitors, many banking players have embraced collaboration with fintech firms or technology partners. Partnerships and investments in fintech companies have become more common, enabling both sides to leverage each other’s strengths.
Further, when smaller organizations face challenges in approach, technology development and implementation, collaboration is an avenue that can help these organizations leapfrog larger firms.
What Success Looks Like
Overall, fintech success so far hasn’t been what many once pictured: disintermediation of legacy banks. The more lasting success has been influencing traditional banks to become more agile, customer focused and tech savvy, qualities that help banks remain competitive in the evolving financial landscape.
For this, the banking industry should be thanking fintech firms for the new lifeline.
About the author:
Alex Jimenez is a Las Vegas-based fintech consultant. He was the chief strategy officer for Finalytics.ai and Extractable. He also has held various positions at Zions Bancorp., Rockland Trust and Bank of America.