Fintech companies look to be the future of banking. We hear a lot about them, but what are we to expect of them? Is the banking industry facing a risk or an opportunity? Can banks adapt and change their culture? The outlines of tomorrow's banking industry are starting to take shape. Technology is not incompatible with the business of banking. People have been talking about technology companies for the last three years, although we have been seeing a resurgence in financial IT since 2007. Fintechs have the answer, whereas banks and treasurers have the question. All that is needed is to match the two together. The crisis and the regulations flowing from it have changed the landscape and fostered innovation. The fact remains, though, that the digital risk is rightly the biggest risk on the banks' radar.
Complete innovation, breaking with what exists now
You will have heard so much about fintechs that they will be etched into your memory and you will be sick of them. Nevertheless, no one could conceive of the world of the future without these innovative new disruptor enterprises. The world is going to change very quickly, but nobody knows how or in what direction. It is like a train trip. You have to set out and leave the platform without really knowing where you're going. This journey is necessary but we often dread it, and culture and heritage count for a lot in this connection. By clinging to our bench on the platform, we risk missing the right technology train. We need to be ready to question everything and to change our mindset. Banks, and not only banks, need to rethink their business models and press into service the new technologies that lead to innovation.
But as we now know, the new technologies go hand in hand with cyber risks and IT crime. This gives rise to what I would call the three paradoxes of the financial technology revolution:
(1) The first paradox is that of sophistication: the more technical we become, the more vulnerable we become.
(2) The second paradox is that of the spreadsheet which is more widely used than ever before whereas the solutions have never before made so much possible.
(3) The third paradox is cost inflation, for example with SWIFT. The necessary increase in security requires such high investment that the total cost has stopped falling and has now started to rise.
Here again, the more technology evolves, the more startling the increase in its cost. We see that technology is not always logical. Unfortunately, it is not easy to plot out our roadmap through this profusion of technologies and solutions, with their greater or lesser degrees of sophistication. In our defence and that of the banks, it must be acknowledged that this is a particularly difficult exercise to carry out and a major challenge. It is a matter of evolving and revolutionizing things in a low-key way so as not to disrupt everything, while at the same time achieving transformation. It is a peaceful revolution like the bloodless Portuguese April coup, or the Tunisian "Jasmine Revolution", not something done by force, which would never work. Low-key but effective, that is what banks and corporates need today.
In a world in which bank products are becoming "commoditised", the only way to set yourself apart is through experimentation. To retain a competitive advantage, banks must use and develop technologies. Digitalisation sweeps aside barriers. The regulatory uncertainties remain. People's time is precious, and they do not want to spend it on the financial aspect alone. If they are to survive, banks need to be part of the platforms and to belong to the ecosystem. It is all too often forgotten that the financial crisis and the regulations introduced as a consequence of it have given a boost to creativity and innovation in finance. The regulations intended to correct the wayward behaviour of the past have changed the financial environment, as with PSD2, for example. New payment methods, the spread of B2C, new players and new (virtual) currencies have shaken up the whole ecosystem.
Categorising the services provided by FinTech companies
On the face of it, FinTech, an amalgam of finance and technology, would seem to describe innovative start-up type companies (but not only to start-ups since some of them have been in existence for 20 years or more) that use technology to reformulate financial and banking services. After the financial crisis, some finance people embarked upon entrepreneurial ventures to reformulate financial service provision through the use of innovative IT. The idea is to simplify finance, and to make it more accessible and less expensive.
Fintechs need to be categorised as a function of the themes and subjects they address, so as to bring them into sharper focus, since there are so many of them and each one is more diversified than the next. We propose to split them into the 12 "clusters" below.
Matching the needs to the means
Matching those who have the answers and the solutions, without knowing to what use they could be put, to those who have needs but do not know that the solution to their problems already exists. The difficulty lies in matching solutions to needs. The technologies, including block chain, exist but have not yet found their proper application. These technologies will be diverted and used for purposes other than those planned at the outset. We should welcome the fact that cryptocurrencies have sparked an explosion in new technologies. This was the catalyst that spurred a new wave of technologies, because fintech’s already existed, and some of them had even been years ago, before recent explosion of new smart technologies. The crisis gave rise to Bitcoin and block chain, and revitalised the “new technologies”. There were fintechs that did not realise they were fintechs – companies that had been in existence before 2007 but that had the impression that they could not qualify as fintechs. Therefore, it doesn’t mean necessarily start-ups.
What do treasurers want? If only the banks knew!
If there is one thing the treasurers do not want, or no longer want, it is the proprietary bank solution. A single and isolated bank that restricts them to working with one single establishment with a multiplicity of solutions. That leads to dependency on the banks. Treasurers want to be "bank agnostic". Agnostic and therefore able to change banks just as they would change their clothes. We are a long way from that. Treasurers want multi-bank solutions, solutions that are multichannel, multiproduct and that combine applications. Why put all your eggs into one basket with one single bank when making them compete would pave the way to flexibility. Dynamic discounting solutions, for example, are a perfect illustration of what treasurers would ideally like. We can find many other examples these days. Overdependence is costly and stops us winkling out the best prices. The banking industry has all too often believed that it had a guaranteed regular income, that is was a necessary evil, that changing banks would be very burdensome, and that inertia would therefore act in its favour. In its favour, certainly, but only up to a breaking point, which we are on the verge of reaching.
The millennial generation is making its presence felt, and with them everything will change!
Some people seem not to have grasped the fundamental change brought by the generation that is now coming into its own. The latest generation will mean that, for the first time in the history of humanity, there will be five different generations in the market at the same time. The most recent is, however, very different and has expectations that will revolutionise the way things work. We need to prepare for it. For them, everything needs to be simple, efficient, linear, free of charge or nearly free, and independent of the restrictions of any system. Choice and freedom are important to them. We therefore need to adopt models that fit their image – simple and efficient. Easier said than done. If we do not adapt to their expectations, however, we very quickly risk running into headaches and conflicts.
The lack of standards, a temporary saviour?
The lack of standardisation currently allows the banks to give the appearance of surviving. For instance, a KYC register does not seem a likelihood since they cannot come together to agree on a standard. On purpose, perhaps? All the transfer formats, even XML formats, are different, and it does not seem possible to agree on a universal standard. The banks are clutching desperately to this straw. But it is a will-o'-the-wisp and no more than a respite. The technology companies' idea is to make the customer experience simpler. The banking industry is in a good position, but it is not irreplaceable. It needs to adapt and also to automate its own internal processes. Here again the legacy IT infrastructure is such that everything is difficult and expensive to change. To really enter into a new level of technological developments, we need to define more universal standards, key pre-condition.
Mechanical Turk or real innovation?
To innovate, the culture needs to change. Financial institutions have evolved enormously over the last ten years since the financial crisis, in terms of compliance with the new regulations. They have invested in controls, systems, and even in technology. However, their legacy IT systems are such that any change is difficult if not impossible. Often banks can patch solutions onto the existing systems, ending up with a shaky mishmash. Digitalisation is perhaps not all that it is made out to be, and like the "mechanical Turk" chess playing automaton, the banks are a long way from total automation. At the time, it was possible to impress Maria Theresa of Austria with this chess playing machine that turned out to be all too human in the end. But we cannot be bamboozled. Total digitalisation is a long way off. With technology, we may expect tomorrow's banks to operate along the lines of a platform model rather than a PIPE [Private Investment in Public Equity] model. This is where the revolution lies. The banking industry needs to adapt and the task needs to create the means to do it, failing which a lingering death lies in wait. But every need for change involves a cultural revolution, and here we think that it will fall short. The Uberisation of all business models it is like a train about to depart. You know you have to climb on board, but not always exactly when and at what price. Not getting on board is tantamount to becoming obsolete and disappearing, but committing too much too early would also be harmful. With technological innovation, it is all about judging the right measure, in outlook and in experimentation, especially since the standards have not been laid down and the landmark technologies have not emerged. Banks think "customer experience" and claim a customer focus – we beg to disagree. They need to adapt to their co-workers and their staff, who are sometimes ill-prepared for these imminent changes. It is a matter of innovating, of taking risk, and of entrepreneurship, but also of being aware of what already exists and of those who deliver it, whence the concept of “intrapreneurs”. Big data does not yet seem to be of major interest to the banks. Who has as much data as they do, however, for example credit cards, that would enable them to anticipate customer wants and offer them appropriate solutions? The banking industry could become a supplier of services other than just financial services.
It all comes down to data!
Computing power has doubled every year since the 1970s. More data has been generated over the last two years than since the outset of the history of humanity. This is a sign that data has become a decisive weapon. And what if the banks, following Amazon's example, were to see certain products as being an occasion or opportunity for gathering information and selling products without earning money but instead generating customer loyalty? Amazon Prime does not aim to make money or to take out Netflix, but instead to win even greater loyalty from the customer base. The banking industry should take its cue from this model, especially since with PSD2 it will have to open up to APIs in any case and share. The banking industry is robust, it has a history, and it has stood the test of time. Its financial standing and credit rating makes it key player that could act as a control tower, and a powerful and crucial aggregator. The trick would be to agree to have promotional products or even loss leaders to corner for itself the flows of information and data (with a huge caveat about the GDPR which will come into force next May 2018). It could become even more of a key player than it already is. Data is the crucial weapon of future, and being able to handle it will be the key to managing customer wants. The banking industry will then be able to offer more services, even non-financial services, to its customers. The banking industry needs to shake off the dusty, outdated image that clings to it. I am always amazed that banks are represented as classical buildings or Greek temples in presentations and graphics. Could you think of anything less appropriate to portray a bank? It is far too simplistic an image. Data is the oil of the fourth wave, and technology is its engine. Has the banking industry grasped the importance of the abundance of data that it holds? It has certainly not placed as much importance on it as it ought. This data could be a lifesaver for it. It is over to the banking industry to make better use of it.
The banking industry of the future is already in the making!
No one can say whether the banking industry will survive or whether alternative banking will succeed. We may suppose that the banking industry in the form that we know it now will not survive. It will be different, or disappear completely. The banking industry has grown bigger and fatter, has had many regulations imposed upon it, and has become somewhat inert and slow to change. It must not become complacent and regard itself as unassailable. Quite the opposite, it is faced with the risk of new entrants to the market. For the most part, the banks seem pretty laid back whereas they ought to be alert and on their guard. It is as if some of them had been left behind on the station platform. Those ones have most certainly missed the innovation train. It is a mistake to think that the barriers to entry are too high. Because the new entrants are selective and will avoid having to apply for bank status with all that goes with it in the way of restrictions and other regulations. The banking industry should base everything on its customers and use them to win their loyalty. As is well known, the young are likely to be the least loyal. More than ever, banks need to win them over if they want to have any hope of keeping them as customers. They face a major challenge if they want to come out of the digital revolution as winners. As Heraclitus of Ephesus said, "There is nothing permanent except change."
François Masquelier, Chairman of ATEL