As FinTech gains pace, how can banks stay on top in 2015?

by Hans Tesselaar, Executive Director of BIAN
Publication: Finextra

2014 has been a real rollercoaster ride for the financial sector. Looking back on a year complete with changes in regulation, disruptive IT outages and innovative competitors stepping on traditional banks’ toes, how can banks ensure they stay ahead in the New Year?

What are the challenges that banks face?
In 2014 banks have been facing competition from all angles. Alternative financial start-ups have been stepping up their game whilst competition also stretched to house hold names that were previously not connected to the financial industry, such as Tesco, who launched their online banking account solution this year. The impact of these new competitors has been so great, that the government pledged its support by introducing a trade body.

Government and regulating bodies have responded to the growing success of the FinTech industry this year. The government pledged its support by introducing trade body Innovate Finance this summer, while the Financial Conduct Authority (FCA) vowed to ‘unlock’ FinTech innovation through revised regulation. With the world’s first IPO of a FinTech company completed just this month, in the form of P2P loan provider Lending Club, it is evident that the FinTech boom shows no sign of slowing down next year.

Where will banks stand in a changing financial landscape?
New firms have the ability to innovate quickly, due to their flexible platforms that are often based on cloud technology. Traditional banks lack this flexibility — instead they are confined to their outdated IT systems that were developed in a pre-internet era. The inability to cope with change is then enhanced by banks adding on layers of technology in an effort to modernise. In some cases, this convoluted IT architecture has resulted in IT outages at major banks as they struggle to cope with today’s financial technology requirements. This has resulted not only in reputational damage, customers air their dissatisfaction, but also further clampdowns from regulators.

The legacy issue
Traditional banks’ ability to place emphasis on their heritage to demonstrate their credibility has allowed them to maintain a strong position in a market that is rapidly being invaded by new entrants. Yet technology legacy also brings inefficiencies — the industry needs to look forward and re-think their IT structures if they are to remain competitive.

By separating their technology into core business functions, banks will be able to determine where they can make isolated updates — ensuring they can offer a service that matches their customers’ demands, without facing the risk of IT outages. For this idea to work effectively, collaboration across the industry is key. Together banks and experts can introduce a new industry IT business standard. This will also allow banks to identify technology tasks that can be managed by a third party, while they focus on providing services that matter to their business.

New entrants may be making their mark with their individual areas of expertise, but traditional banks are still in the position to dominate the market with their broad financial capabilities. FinTech companies are placing their attention on technology alone, while banks have the support of a sophisticated financial history. Nonetheless, banks cannot afford to be complacent of their dominant position and will need to focus their attention on innovation if they are to remain competitive in 2015. By collaborating on their common IT structures, banks can focus on individual business success.