Customers expect much more from their banks today. They expect a full digital experience that engages them on an individual, personal basis. Fintech firms have excelled in customer experience and are far better at offering tailored products and services than banks, despite the latter’s advantages in infrastructure and legacy brand recognition.
The Capgemini World Retail Banking Report 2022 found that 52% of respondents felt their bank was not “fun”, with many reporting that their banks did not offer them the seamless experiences, personalization and innovation they wanted from their digital financial relationships.
In contrast, 85% revealed that they would recommend a fintech firm to a friend or family. In addition, approximately 75% said that fast, affordable services that are accessible and easy to use motivated them to consider switching to a fintech provider.
While the banks have remained in their stronghold since they have many more years of experience to offer, their legacy structures often leave them in the perfect position to guide their younger fintech cousins in the right direction. Neither banks nor fintech firms exist alone in the financial world; they form an ecosystem where they can learn and grow with each other, creating greater stability and customer satisfaction.
Finextra spoke to a range of ecosystem players including Capgemini, HSBC, Metro Bank, Zopa and Payoneer to uncover what banks and fintech firms can learn from each other.
What can banks learn from fintechs?
Fintech firms are better at leveraging data to supplement the customer experience to improve product range and innovate in a timely and relevant way, explains Gareth Wilson, vice president of UK banking and capital markets at Capgemini. “I always describe the banks as data-rich, but not particularly data-centric. Whereas fintech is able to leverage data.”
Thomas Halpin, global head of payment product management at HSBC global liquidity and cash management shares this sentiment: “At the heart of this is customer needs, and fintechs have shown how important it is to use data and modern technology to deliver a customer-centric user experience. The pace at which fintechs continue to adapt and innovate in this space is a key learning for banks.”
James Allum, SVP at Payoneer, explains that until recently, banks have been able to rely on a loyal customer base by developing personal relationships in local branches. Conversely, fintechs have always relied on data to understand their customer base and shape interactions with them. The democratization of financial data through regulations such as Open Banking has benefited consumers and businesses, and digital-first fintechs have been better positioned to quickly implement technologies such as AI and machine learning to harness the power of data.
As digital organizations, fintechs understand digital customers, notes Allum. Creating digital relationships has always been an innate part of their business, and they don’t struggle with legacy systems to incorporate new technology. “We live in a new age of digital commerce and fintechs benefit from the fact that their customer base comes to the platform as a digital service, while traditional banks must maintain personal services as well as digital offerings to cater to their wider customer base.”
Gamification presents another unique way in which fintechs try to engage their customers in a new way. Wilson argues that because people like this approach, they are motivated to engage and keep coming back to the experience. He continues that fintechs are better equipped to create this engagement from a customer experience standpoint than banks, “creating greater value and greater emotion.”
Building this emotional connection with a customer is challenging, and while many banks have made progress, it is more challenging for them compared to their fintech counterparts, argues Clare Gambardella, chief customer officer at Zopa. Not only do banks have legacy systems to overcome, they also have entrenched ways of thinking about products that are outdated and do not serve the end user. In this regard, they have a lot to learn from fintechs.
Many fintechs are able to differentiate themselves through their technology, because a satisfying technological experience can create loyalty from customers that keeps them coming back. In recent years, many banks have taken note of this and formed partnerships with fintechs to exploit fintech’s position in this area.
Kat Robinson, customer experience director at Metro Bank explains that working with fintechs has benefits for banks, as it enables them to accelerate strategy and provide affordable access to cutting-edge technologies. “The enthusiasm and energy these young companies have also challenges the bank and colleagues to think differently and focus on innovation.”
The banks must think about how they can improve the customer experience in a digital first way. While Zopa now has its banking license, it has strong roots as a fintech and is able to take a “digital first” approach. Gambardella explains that achieving this digital first approach means more than just putting an attractive user experience on the front of the product or augmenting legacy processes, rather, “it means really thinking through the customer experience in a digital first way. That approach is why companies which Zopa can deliver at a much higher speed. For example, opening an account in three minutes, determining 95% of our loans in sixty seconds, and providing 99% of our customers with loans in under two hours. That speed comes not only from digitize a manual process.”
What can fintech learn from banks?
Despite the many benefits that banks can learn from fintechs, financial institutions continue to have strengths and advantages that are more difficult for fintechs to achieve. Most notable, our interviewees claim, is the trust factor.
The strength of reputation and trust held by established financial institutions – especially when it comes to handling customer data, is inherent to the banks’ loyal customer base. The Covid-19 pandemic reinforced this, according to Wilson, with banks doing “well in terms of their response and increasing customer confidence.”
“I think we all trust the banks to be able to carry out transactions, to be able to make payments, to be able to give us very accurate and up-to-date information. So they have that benefit of that trust.”
On top of this, the banks are also very focused on security, risk management as well as redundancy and capacity planning – probably a result of the intense regulatory scrutiny the industry has long been accustomed to. These disciplines help keep banks safe and secure and build customer trust, but they can often be a challenge for fintechs as they rapidly scale their businesses, Halpin explains.
Without a strong reputation for effective risk and security management, the emotional relationship between fintechs and their customers can be damaged. In addition to this, fintechs also run the risk of scaling effectively. While large financial institutions have been able to scale over time and build a robust, loyal customer base, fintechs are pressured to scale their customer base quickly, and this presents unique challenges.
Halpin argues that although fintechs rarely have challenges scaling their technology, they are often challenged by expanding their customers and user base quickly enough. “Banking scale has been acquired over many years, through the delivery of a range of financial services that meet the changing needs of their customers wherever they may be in their own financial lifecycle, building long-lasting relationships.” Halpin recommended that fintechs should adopt a similar strategy by expanding the breadth of their services or could consider banking partnerships that turn good ideas into good solutions with the scale, robustness and regulatory support to make a real difference to customers.”
Metro Bank’s Robinson continues that the scope that many banks have over fintechs can give them an insight into customers. Banks can share their experiences in understanding their customers, how they behave and what they want, “which can help fintechs develop their propositions and use cases.”
This ability to scale can affect the profitability of many fintechs. Although fintech is becoming increasingly profitable, many are struggling to get to that stage. Incumbents typically have greater capital resources to allocate to scale efforts, giving them a stability that encourages customer relationships. Although older technology causes problems, banks’ broader reputational strength gives them a significant advantage.
To this point, Wilson questions: “I think that’s the area where fintechs are lagging a little bit. How do they go beyond popularity to profitability, and therefore become more sustainable businesses.”
From Zopa bank’s perspective, with their overall focus on achieving profitability, Gambardella argues that fintechs should consider the fundamental factor of how and why the banking business model has been successful for so long.
“Established banks are very profitable. It has been a big reason why they have been sustainable through very uncertain economic periods. The fintech industry has largely been focused around the idea of growth, especially around prioritizing customer growth figures, above all else. This has been driven by the climate in the stock markets in recent years, which is highly prioritized for platform or customer growth, in some cases beyond the business model and profitability. It is definitely changing. I think what we are seeing is more and more companies wanting to create a business model that is sustainable.”
Since fintech is still in its early stages as an industry, Allum suggests there are a few ways fintech should learn from the incumbents as they enter the space. “As companies move into the next phase, they can look to the banks to understand how to operationalize on a larger scale. There are so many considerations that need to be balanced in a company of scale, and for some fintechs this requires a complete shift in mindset. The scale of traditional financial institutions means that they are woven into the fabric of the financial system. As fintech companies mature and become more tightly regulated, they will naturally need to emulate banks in some ways.”
Can banks and fintech build a symbiotic relationship?
When asked if the relationship fintechs and banks can nurture into the future, Allum states that it should be less about teaching and more about understanding the mutually beneficial roles that both fintechs and banks can play in the market. “There are of course areas where banks and fintech compete, but the notion that the two are at odds is unfounded.”
Allum adds that there are great opportunities for collaboration between fintechs and banks. “From a product perspective, banks are perfectly placed to provide the infrastructure, like plumbing for the financial system. Fintechs are able to innovate on top of and within that infrastructure to create solutions that benefit all players.”
Robinson adds that Metro Bank has learned about focus, speed to market and genuine agility from fintech over the past 12 months. “This has really helped reinvigorate our culture with the spirit of innovation; we have seen this significantly reflected in our annual colleague feedback. We launched our first innovation lab last year and ultimately chose to work with three new startups to improve our customer journey, operational efficiency and data governance.”
Neither banks nor fintech will disappear, both will co-exist and grow from each other’s experiences. Fintechs today have an advantage when it comes to the emotional relationship they form with customers, but banks can learn from these methods. Banks have such scale and legacy advantage that fintechs seek to learn from, and indeed many banks will help fintechs with this through strong partnerships and innovation.