Posted by Bethany Frank on 27 May 2016
CBS News’s 60 Minutes introduced millions of viewers to the world of financial technology or “fintech” in a feature on brothers John and Patrick Collison, the founders of popular online payment platform Stripe. Stripe and similar companies are part of an emerging trend in the banking space known as unbundling, in which next-generation technology start-ups chip away at the profit margins of large banking conglomerates by offering consumers more efficient online alternatives to various financial services.
The Collison brothers argue that consumers are looking for the same speed and convenience they expect from social networks and smartphones from their financial service providers. With banks slow to respond to the so-called digital revolution, youthful and agile technology companies are stepping in to fill the void. New players like Venmo, Square, Stripe, and TransferWire are managing to bypass the delays and challenges associated with banks to quickly connect consumers with the financial services they need.
While it’s true that consumers are opening up to the idea of financial services from entities outside the traditional banking sector, financial institutions still hold some advantages over the new competition. For example, banks make tremendous efforts to operate within the framework of complex risk and compliance regulations. Despite the public’s generally favorable views towards the technology sector, many are still wary about conducting financial activity outside the secure structure of a bank. Millennials, however, tend to be far more critical of financial institutions and are more open to banking alternatives, especially those from Silicon Valley. In the long run, banks will have to offer services that rival the speed and convenience of tech-based alternatives.
Financial institutions also benefit from a much higher level of stickiness with their customers. They are well-poised to take advantage of the existing connections they have with customers by offering further innovation that keeps them around. Unbundling is a reality the banking industry must deal with, but banks can respond to the pressure by acknowledging changes in consumer behavior and adjusting strategy and service to match. While arguably disruptive, the digital revolution as a whole presents a great opportunity for banks to modernize back-end systems to meet today's standards.
Banks are often hesitant to pursue modernization due to the complexities involved, but they need not face the challenges on their own. Although often a source of competition, there are plenty of allies in the technology sector who can help banks fix the infrastructure issues that bind them to slow, outdated processes. Partnership with a financial technology provider can help banks uncover innovative solutions for payments, money transfers, and more in evolving markets.
Rather than allowing third-party competitors to seize market share, banks can reap the benefits of established relationships by offering their customers similarly innovative products and services. A technology partner can help banks understand and address IT requirements, develop advanced solutions to various customer needs, and deliver them to market quickly and efficiently. With the right direction and support, banks can turn the competitive nature of unbundling into something positive, profit from opportunities emerging in the new financial services landscape, and pave a new path forward.