Feature: Who wins in the financial services of the future?

New propositions delivered by fintechs have over some time challenged the value delivered by traditional banks. But just how disruptive are fintechs to the sustainability and relevance of large banks? How much of the proverbial ‘lunch’ of large, long-standing banking institutions is at risk from the disintermediation that we see growing at a rapid rate? If we consider increasing investment into the sector as a leading indicator, the numbers tell us that indeed the unprecedented growth in fintech investment is sufficient for us to believe that the disruption is material.

In order to play catch-up, large banks are going to have to direct a significant amount of time and resources into reviewing how existing models deliver value to their clients.

Shifting business models
The notion that fintechs will become infrastructure providers and a source for innovative solutions for banks in the future is starting to gain momentum, with a few use cases already in place to demonstrate the value that can be unlocked through these partnerships. The ability of banks to implement open banking, marketplaces or ‘banking as a service’ will be instrumental in ensuring that key banking players maintain a competitive edge over their peers. The pace at which banks can build open banking APIs that allow for seamless integration between client and third-party systems, thus enabling the ability to offer broader value propositions which could appeal to the bank’s clients and other players within their ecosystem, is paramount. The inhibitants to implementing this remain the age-old factors that have been the bottleneck in banks being able to develop value-added products and services with their existing stack – slow and uncertain approval processes, management of multiple vendor relationships, and the complexity of building on top of existing infrastructure.

What will separate the wolves from the pack is not only the pace of API builds but also the quality and relevance of the product scope or value-added services that will be available on these open banking platforms.

Removing the friction
The common phrase by Bill Gates which says ‘banking is necessary, but banks are not’ alludes to the fact that the friction caused by traditional banking models is not needed, and with some ingenuity and innovation can be eliminated. Payments do not need to take long as they often do, the time to resolve queries needs to be more seamless and human and manual interventions can be minimised.

Digital banks
The efficiency, convenience and cost-effectiveness offered by digital banks remove much of the friction that established banks are still trying to unwind. Industries such as insurance and telecommunication companies are well poised to develop cutting-edge banking solutions off the back of financial data and insights that sit within their ecosystems. Banks must bear in mind that as the rise of digital banks creates competitive alternatives for clients and factors such as a frictionless service experience, the ability to self-service and hyper-personalisation (and without the customer feeling it in their pocket), is what will create stickiness in this highly digital era.

Payments
Banks must ensure that they stay on top of the macro-trends affecting the payment landscape as payments provide the foundational relationship-building elements with clients and are a sustainable source of revenue. The most prominent of these trends are (1) the ability to enable mobile payments and going completely cashless and cardless (2) across multiple currencies, including digital currencies and (3) across various jurisdictions.

The very real threat to payment flows that banks face poses a significant risk to the future profitability of banks. The direct competition is a result of the innovative solutions that have been crafted by fintech players. What fintech players have done really well is to exploit the verticals by understanding the differentiated needs of clients. Banks must identify the industries or customer segments that align to their broader strategic ambitions and design their payment value propositions to secure that payment business. Once again, the build of APIs becomes critical as it allows banks to embed or leverage existing payment solutions from other ecosystems, thus potentially eliminating the time and money that would be spent to build in-house.

Activating data-driven insights
There is no question about the value of data now more than ever in any industry. How banks obtain and analyse the data that is available to them (to a large extent via their payments solutions) will not only assist them in driving operational efficiency, improving the client experience and mitigating risk, it also provides a source of new revenue streams. Data itself can be monetised and sold to clients or third parties and can also be used to design new solutions.

Leveraging emerging technologies
There is a growing number of Web3 use cases in the financial ecosystem and the benefits to be derived for both clients and the banks themselves are numerous. The ability to enhance client experiences through metaverse simulations and leveraging the abilities of generative AI in these environments introduce very exciting prospects.

Blockchain also represents a unique opportunity for banks to simplify transactions, enhance security and democratisation. A widespread example currently being explored or adopted by many banks is the notion of transforming custodian services via a distributed ledger. The benefit here is increasing the level of transparency within the custodial business. The custodial bank typically represents just one component in an entire value chain of participants, including investors, brokers and potentially other custodians. Blockchain introduces efficiencies in a typically manual and opaque chain of activities.

Looking forward
It is clear that banks are facing a myriad of pressures introduced by the fast evolution of technology. To stay in and win in the game, at the highest level I think banks need to focus on two major enablers:

Shifting the technology skill set
The technology skills mix within banks needs to be reviewed and aligned with the digitalisation and innovation strategy. The lion’s share of tech capacity within banks is directed at building (usually reactively) and keeping the lights on, with little to no capacity allocated to innovation and in particular building some of the emerging technologies that are growing in prominence such as AI and blockchain. Technology specialisations are expanding constantly – there is a rise in skills centred on emerging technologies such as blockchain, robotics and AI engineers, Web3 developers etc that will be key in building use cases internally. Without these skills in-house, banks will continue to build reactively, and most likely with outsourced resources or vendors. Capacity-building for skills of the future needs to be top of the agenda.

Strategic partnerships
Banks lack the capacity to innovate and their (over)organisation makes decision-making sluggish. Fintechs are better able to pre-empt and cater to client financial needs with a lot more agility, creativity and faster time to market. In order for banks to defend their position as the go-to for core financial services they must acknowledge that strategic partnerships with technology companies, primarily fintechs, will become more and more imperative. While this concept is not new, the pace at which we see strategic partnerships is still quite low and the chasm that gives fintechs a competitive advantage over banks continues to grow.

There are no clear winners in the future of financial services aside from those who fully embrace collaboration across the banking and fintech ecosystems, ensuring strong strategic and execution alignment and a commitment to unlocking new value to financial services clients.

Author
Thina Tembani CA(SA) is an investment banking professional providing executive support in operations, technology and strategy at Rand Merchant Bank