Fast change is built into our modern society, and no industry can hold back time. The financial services industry may have come the closest by holding innovation hostage to risk management for decades. But, with the rise of fintech firms and heightened customer expectations, financial institutions must catch up or face the consequences, according to The Financial Brand.
While plenty has been written on the meteoric rise of leading fintech firms, it’s no secret that these firms have made borrowing, budgeting, collecting, saving and spending money as easy as playing games on a mobile phone.
Fintech firms have found success by discovering gaps in the services provided by traditional banks and credit unions. To fill those gaps, these firms have created solutions that are available to consumers and businesses who are already looking for better experiences, easier access to data, less hoops to jump through and more consideration for their individual circumstances.
Account aggregation firms, such as Plaid, Yodlee, Finicity and MX, mobilize data in a way that enables many fintech solutions to present information “in context,” surrounded with relevance and meaning. Advanced mobile device capabilities make it possible for firms, like Square, to offer access to payment rails in a more efficient and cost-effective way, putting card acceptance in the palm of the hand. Streamlined data collection, automation and artificial intelligence all make it possible for lenders, like Kabbage and OnDeck, to provide an all-digital, easy to understand and less bureaucratic process for lending.
To succeed and stay relevant in the future, financial institutions need to be more aggressive, play well with others and focus more intently on solving problems.
To be successful in the future, financial institutions need to be more aggressive and take on different risks than those to which they are accustomed. If you minimize risk, you minimize returns. If you eliminate risk, you eliminate your financial institution.
We aren’t just talking about the financial side of risk, we are speaking about taking risks in learning, inventing and exploiting digital technology in a way that benefits your customers. We’re talking about instituting proofs-of-concept, investing in innovation internally and externally and taking ownership of your institution’s future.
Financial institutions, by in large, have access to the same technologies as fintech firms and have smart employees, too. However, the difficulty most financial institutions face is in being able to focus and execute, taking ideas from PowerPoint to production.
Where financial institutions don’t have the right competencies in house, they must take a different kind of risk – engaging strategic partners that will help ensure success. Financial institutions must also be mindful to dedicate focus on strategic projects. Innovation isn’t a part-time job, and it isn’t for the faint of heart. Many financial institutions find it helpful to create subsidiaries or CUSOs to pursue strategic initiatives and/or invest in fintech enterprises directly in order to ensure their voices will be heard long-term.
Play Well with Others
Not only do financial institutions need to start thinking and working more aggressively, but they also need to develop core competencies in creating and succeeding through partnerships. There are thousands of fintech players out there, and no financial institution can replicate such intense focus on so many different opportunities. That’s why fintech partnerships are so essential. Yet, such partnerships require not only business development skills but also digital platform infrastructure and technical skills conducive to introducing new capabilities to market, and then scaling and maintaining them over time.
Roughly half of fintech firms want to partner with financial institutions to offer their solutions to end users. Partnering with these firms can be very beneficial as long as financial institutions maintain control of the customer relationship and specifically, the authentication process. Larger financial institutions will find more bargaining power over suppliers. However, fintech firms like to work with smaller institutions, where they often find a more collaborative environment.
Of course, playing well with others can take many other forms as well, such as being able to offer up and consume APIs, including support for FDX and other upcoming protocols that certain customers will require.
Maintain Customer Focus
Financial institutions will not be able to measure success in the same way for every customer. Becoming the “primary financial institution” is an elusive goal and probably not the right goal anyway, for most financial institutions. Some consumers and businesses may value functional breadth that permits one stop shopping, but others will require extreme functional depth and extreme openness to plugin to their financial lives at the right time and in the right way, according to their wants and needs.
There are two keys to success here. The first is effective digital product management, which includes a discipline of engaging with customers to really understand their needs.
It has been said that for digital product managers, nothing important happens in the office. This is certainly true as financial institutions work hard to uncover unmet needs and learn how their solutions are really used “in the wild” to improve and build new solutions. This is required whether solutions are built internally or in partnership with fintech firms.
The second key to success is effective development processes and practices. Any new software development project is time and resource intensive. Poor planning is the most common cause of both time and cost overruns, as well as ultimate failures. Software development isn’t as easy as it may appear from the outside, which is another reason that financial institutions should consider engaging dedicated resources and partners that can help execute strategic projects. In this way, financial institutions can benefit from a long track record of success brought to the table by these added resources.
Rising to meet the challenges of an increasingly competitive space where customer expectations are always on the move can quite frankly be a scary proposition for most financial institutions. However, it can be done. We’re working with fintech firms, banks, credit unions and lenders that are doing it every day, and we love being a part of their innovation processes.
To find out how your institution can launch the digital solutions your customers want, in a safe and secure manner, reach out to us today.