Digital and Distributed: Will Fintech Startups Kill Incumbent Retail Banks?

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NewtonX conducted a 560-person survey with banking executives at over 125 global and national retail banking providers with the intent of gauging the future of retail banking in three key areas: channels/distribution, Big Data and emerging technologies, and competition from disruptive startups.

Incumbent global banks are almost unanimously undergoing massive transformations away from offline legacy processes into digital and mobile-first strategies. J.P. Morgan, for instance, spent close to $20B over the past two years on what it refers to as “Mobile First, Digital Everything” — a push toward technology and a new generation of retail banking tools. For JPM, as well as other incumbents, investment in digitization has paid off: the bank’s mobile active users jumped 12% YoY in Q2 of 2018, and it reported 48M active digital customers.

Competitors including Wells Fargo and Bank of America are likewise making large investments in digitization in order to compete with smaller banks and financial services providers that are increasingly capturing share through lean, customer-first mobile approaches. Will this investment in digital-first technology be enough to stave off young competition, though?

Key challenges for digitization: Tech Talent, Legacy Systems, and Competitive Reach on Digital Channels

Online only banks such as Radius, Chime, and Simple offer lower fees and higher interest rates than traditional banks because they have leaner operating models without the high costs associated with brick and mortar branches. In fact, 47% of executives interviewed said they believed the industry is heading toward virtual banking. Branches will become more and more unnecessary and burdensome as every aspect of banking goes online and cash usage declines. 88% of executives stated that branches will need to become more productive or less costly if they are to stay in use. Indeed, almost all major banks have closed branches and reduced staff.

However, branches won’t become completely obsolete. Rather, they will morph into smaller, leaner hubs for financial advice and education, or turn into smart ATMs offering remote service in addition to cash. To compete with virtual banks, incumbent leaders will drastically lower the costs associated with branches, and divert investment toward digital channels.

Another challenge facing large banks is reimagining the workforce. 59% of executives said that attracting, retaining, and training top tech talent is a priority for 2019. For some banks, such as J.P. Morgan this includes partnering with fintechs such as Zelle and investing in new programs such as the bank’s Finn, a completely mobile bank. Goldman has reported that it employs more developers than traders and bankers, part of its effort to change its 100+ year reputation as a traditional bank into its new image as a technology-first company. Most banks have also invested in robo advisors and chatbot assistants. To optimize these automated services, banks are investing in top tech talent to deliver on the best experience possible.

Finally, one of the biggest challenges for incumbents is expanding competitive reach on digital channels. This means building out new technologies, marketing campaigns (think: Finn’s $100 signing bonus), and banking licenses. Banks aren’t just competing against other banks now; they’re also competing against payments providers and financial management apps, and will have to decide whether to partner or compete. When asked if they saw disruptive banks and payments services providers as potential partners or as competition, the NewtonX survey respondents were divided: 37% saw them as competition while 42% saw them as potential partners.

Disruptive Nontraditional Players: Opportunity or Threat?

Many incumbents have already begun a combination of partnerships and flagship products that compete with disruptive offerings. For instance, Goldman Sachs debuted its online-only no-fee personal loans & high-yield savings for individuals, Marcus, while also leading investments in fintech startups that provide services such as trading analytics.

While incumbents need to dramatically alter their traditional methods of retail banking, the reality is that there’s room for both incumbents and disruptors to grow and succeed in the increasingly fragmented digital landscape. One of the key deciding factors for startups’ success will be security: recent high-profile breaches have eroded consumer trust, and proving that consumer data is protected online will be paramount for regaining long-term customer faith. Banks and payments providers that can offer digital-first products and services with low overhead and high levels of security will thrive in the new consumer banking landscape.  

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About Author

Germain Chastel is the CEO and Founder of NewtonX.

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