The future of the bank-fintech start-up relationship

Andy Harmening, Bank of the West: We cannot ignore the forces at work today

As technology continues to proliferate in the world around us, banks are no exception. Digitalisation is revolutionising the way consumers interact with everything – companies such as Amazon, Apple, Airbnb, Netflix and Uber have transformed customer expectations and created a ripple effect across all industries.

We cannot ignore the forces at work today. Across demographics, banking customers are increasingly using digital tools and expecting advanced, customised services. For example, 27% of all customers and 40% of millennials would consider a branchless digital bank, according to Accenture’s 2014 North American Digital Banking Survey.

In the US, the branch remains the source of banks’ most valuable accounts – as customers with multiple products who want deeper relationships with their bank — but we are also seeing a greater share of global transactions and revenues attributable to digital channels.

A whole new world
It is indisputable that there is a steady uptick in demand for digital services. Digital is impacting virtually every aspect of the consumer banking ecosystem: from selling and customer acquisition to account opening to servicing.

As customer expectations change, fintech companies are quickly developing cutting-edge products and services that are responding to customer preferences. The best fintech companies allure customers through intuitive, transparent and efficient products. And while not all fintech companies are competing directly with banks and most are “mono-line” – focusing on a particular slice of the financial services pie – many challenge the banking model we are familiar with today.

It may feel easy to dismiss the rise of fintech companies as the latest version of “fly by night” operations. But, while some of the players fit this description, the risk management foundations of many of these new players appear sound. And while impending regulation, interest rate increases and downstream liquidity implications may pose the greatest risks to the fintech industry, we expect many lending fintech companies to survive through the credit cycle.

As a whole, the banking industry must confront the elephant in the room: how do we respond to the rise of non-bank companies looking to address what are, traditionally, the problems that banks have handled?

Natural allies
While it is true that some fintech companies compete directly with specific services banks offer, more and more we see fintech companies seeking opportunities to partner with traditional financial institutions or offering complementary services as enablers. According to a recent Accenture report, in 2015 investment in fintech firms looking to collaborate with the banking industry increased by 138%, representing nearly half of all fintech investment.

We believe that symbiotic relationships with fintech companies can enhance our customers’ experience and help us to adapt to our rapidly evolving world. That’s why we are actively pursuing partnerships across all areas of the business and hosting our second international hackathon in collaboration with BNP Paribas to convene an ecosystem of innovators around the world and harvest their best solutions within the bank.

How else can banks contend with fintech innovators?

• Always be learning: As banks, we need to monitor, understand, and learn from the innovations that have come from fintech. These companies are teaching us how to bring products to market quickly; they are teaching us about customer experience and how to respond to rapidly changing market trends. Be receptive to these learning opportunities.

• Have a plan: Banks need to plan on the abundance of fintech companies – both symbiotic enablers and competition – continuing to flourish. Customer expectations are evolving. Nearly every aspect of banking is changing. It’s important to maintain what has made banks successful, while finding new ways to meet customer demands today and in the years to come. To do this, banks need to plan for continued change by building innovations internally, partnering with fintech providers, or acquiring these competitors. With no plan in place, banks run a bigger risk of going the way of Blockbuster and becoming obsolete.

• Know your strengths: Now is the time for banks to recognise the value we provide to consumers and businesses; the intrinsic advantages we have as multi-product versus mono-line providers. We have deep relationships with many of our customers and thus have a wealth of valuable data about customer behavior and preferences. We need to appreciate that we own the customer relationship, and build on that trust by using that valuable information wisely to nimbly meet their needs.

So, what is the future of the bank-fintech relationship?

Banks start from a strong position compared to standalone fintech companies in part because banks are multi-line rather than mono-line. We help customers see their full financial picture, because we offer such a vast array of services. In many cases, we have pre-established relationships with customers who know us well and want us to adapt to meet their needs.

Our customers still value a strong, personal relationship with their banks, but this has evolved due to the digital revolution – today, they also want ease-of-use and enhanced convenience.

Banks have the potential to bring together the best of both worlds for our customers – providing them with excellent service, access to specialised bankers to meet the full range of their financial needs, and solutions enhanced with the latest digital technologies to deliver the optimal customer experience.

By Andy Harmening, vice-chairman of consumer banking, Bank of the West