If banks are chaotic, can fintech be the messiah?

By  |  0 Comments

Since the 2008 financial crisis, we feel we have opened the pandora box for the prestigious banking business. After 8 years, just when we thought things might have gotten in control, scandals of Wells Fargo crept out like a can of worms. Then there is this massive banking layoff news hitting our headlines. From the US to Europe, between 2015 to 2025, total headcount reduction is forecasted to be 30%, which means over 1.7 million employees in this sector might lose their jobs soon. In China, big four state-owned banks, which are often perceived as gold in the past, perhaps now look like glass as in the first half of 2016, their total work force decreased by 1.5%, slashing over 20,000 staff.

We know traditional banking is troubled, struggling with insufficient ROE and lack of strategic coherence. Research and consulting companies are publishing all kinds of white papers and reports about financial innovation, yelling it is time to make tough choices and bold actions. Fintech, essentially an old concept somehow becomes a revived buzz, and begs below questions without much crystal clear answers today:

-Are we facing the end of banks?

-Will Fintech startups take over traditional banks in future?

-Will traditional banks be able to bring in fintech to transform themselves for survival?

-Given banking fintech transformation is accomplished eventually, does it mean the future banking will be an extremely lean model, with only technology, robots, data scientists to run it while the rest of us are just irrelevant?

Although in the west, most banks are rapidly expanding their digital offers in retailing banking, including GoldmanSachs’ launch of its own online direct banking this year, the phenomenon would be probably best summarised by Mark Mullen, CEO of Atom (the mobile only bank backed by Spanish BBVA):

Banks are trying to be cool and hip and build super cool digital front ends… But it’s like putting lipstick on a pig – ultimately it’s still a pig and the new front end is still running into an awful digital back end

So in a profound way, the legacy infrastructure and culture are rendering many banks fatally flawed in accelerating digital and fintech.  Banks often have to confront the new tension between their traditional world of exclusivity and the digital world of access for everyone. One exception here might be mbank, owned by Commerzbank in Germany, which is the 3rd largest retail bank in Poland and considered one of the most innovative in direct banking in EU. It can provide credit assessment and underwriting in 30 seconds via mobile, and paper statement is no longer an option. Some experts said it achieved such high efficiency at this stage that most US banks would fail to compete with. 86% of mbank sales are conducted through either online or call centre while the average figure for most western banks is just about 20%.

In China, the situation is more akin to dinosaur putting on lipstick. Someone probably would mention anomaly player like PingAn Group, nonetheless, we have to bear in mind the company’s humble beginning was insurance and today is still their core business. It is, in fact, the local internet giants such as Alibaba, Tencent, JD are pushing proactively in financial innovation and providing a much better customer experience for a large underbanked population. They are also looking for cross-border investment in fintech. The recent example would be Baidu and JD co-invested in ZestFinance, LA-based startup to apply big data analysis for credit scoring and risk control.

If banking is solely about customer experience or enhancing element of value chain, then internet giants or fintech startups will for sure win and rule the future, nevertheless, it is, in reality, a complicated system encompassing regulation, compliance, security, fraud prevention, government supervision, especially when we move away from retail banking to corporate banking or CMIB (Capital markets and investment banking), things are just getting more arcane.

Some opinions suggest fintech startups need not act as a radical disruptor, but rather as a partner to drive improvement for banks. Certain research shows that some banks are already either partnering with startups to develop and customise fintech solutions, or simply becoming the investors in them. They are applying machine-learning and robotics to areas including product control, operations, middle office and risk management. Efforts are also underway in the block chain arena to develop “smart securities,” programmable financial contracts aimed at reducing reconciliation costs, increasing security and transparency. Among them, GoldmanSachs, Citigroup, Banco Santander, along with their corporate venture units are said to lead the biggest bank investment in fintech in the past 5 quarters, though scandalous Wells Fargo is also counted as one of the top banking investors in fintech. They seem to be up to the current challenge but not all are there yet.

At the end of the day, we should realise fintech is just a tool for banks. Old-fashioned business model must be gone. The banks that can integrate with cutting-edge fintech technology and put digital experts in leadership positions will stay in the race. But it is always easier to be said than done. The harsh reality for banks is: do or die. For those which cannot, fintech companies or internet giants are more than happy to take up their roles quickly.

Cecilia Wu

A witty, nutty and frosty writer who hopes to jot down moments of inspiration from her daily life

You must be logged in to post a comment Login

Leave a Reply