Traditional banks are failing in their innovation mission

“In the near future, almost all companies will derive a significant part of their revenues from financial services,” said Angela Strange, a partner in the US fund Andreessen Horowitz. A reality that would allow financial services institutions to focus on launching new products, and less on maintenance, or fraud management that would be optimized and handled by these derivative companies.

“It is not necessarily easy to develop financial services, since the agreement of the financial regulator of each country is necessary in order to obtain approvals, and is subject to strict compliance rules,” added Adrien Touati, co-founder of manager.one.

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Banks are still struggling to innovate

A World Economic Forum survey has revealed that only 28% of Millenials and Generation Z trust their banks to be fair and honest. This extreme level of customer dissatisfaction is a clear indicator of the difficulty banks are having in terms of change and innovation in the ever-changing industry. “Most institutions have been in business for over 100 years, and have a large sales floor which makes it difficult to reduce costs and deploy new products quickly. It is also a highly regulated industry with a very complex infrastructure. Even for startups, there are huge challenges,” Strange pointed out.

Companies are offering more and more fintech services

Despite these challenges, innovation does in-fact manage to reach financial services, coming from start-ups, financial services institutions, and from existing companies that are adding financial services for the very first time to their offer in particular.

The novelty of offering infrastructures “as a service” is already reaching financial services. In particular, Apple who has just launched a credit card. Uber and Lyft are also positioning themselves as carpooling companies but also offer banking services to their drivers in order to improve driver retention. This development also concerns BtoB, such as Shopify who provides website services to any merchant for a monthly subscription fee. “These new offers from existing companies are not just financial services. Above all, the players want to simplify the life of their customers and partners and that doesn’t only involve financial services,” said Adrien Touati.

More and more companies are also expanding in order to facilitate the creation of new offers. For example, the creation and development of a simple budgeting, or financial forecasting application for individuals actually require the need to know all of the clients’ finance details, and there are thousands of different banks across the United States, and even more around the world, using various data formats. As a result, its difficult to obtain this data when the application is not even created yet. Companies like Plaid have focused on and pushed towards translating this data into a usable format. This new layer of pre-construction infrastructure has accelerated companies like Earnin, which allows users to quickly access their payroll.

Fintech sector  is developing to meet banks’ needs

Other companies have positioned themselves in niche markets in the banking sector. Comply Advantage, for example, monitors lists of sanctions and terrorists for businesses to help banks comply with money laundering laws. Sentilink specializes in identifying frauds based on fully fabricated identities, which are very difficult for banks to detect. “Being able to respond to the problems of banks is feasible, but not in the near future because the reality is that the decision cycles within traditional banks are very long, too long,” said Adrien Touati to our microphone.

Nearly 2,000 financial technology companies were reportedly launched last year alone. Existing financial institutions may finally be able to replace some of their old systems and spend less on maintenance to focus on launching new products faster by partnering with some of these startups. “Traditional banks spend millions on IT maintenance but do not have in-house entrepreneurial profiles to develop new products. Traditional banks have completely failed in their mission to bring more services to their customers,” stated the co-founder of manager.one.

Choosing between internal or external innovation

Traditional banks could still benefit from the development of their market by collaborating with the fintech sector, or by pushing entrepreneurs’ initiatives internally. Therefore the question is whether this innovation process should be internalized or externalized. “What is so unique about this evolution, is that during big changes in the industry there is often one winner and many losers. In this case, everyone has the opportunity to participate and improve significantly. For startups, we’ve seen some examples of new infrastructure companies under construction and there are many more opportunities. There are even more opportunities in the thousands of experiences that are going to be unleashed as a result of offering these infrastructures,” said Angela Strange of Andreessen Horowitz.

The D-Rating agency, which specializes in rating companies’ digital performance, recently published a ranking of the 21 retail banks operating on the French market to measure their digital proposition. To do so, it used 420 indicators that measure the level of digitization of the offer, the efficiency of digital communication channels and the performance of the customer journey linked to the bank on a daily basis. The 2019 study shows that the gap between neobanks and other institutions is narrowing. “The richness of digital functionalities and the digital proposition of certain historical players are on a level globally comparable to that of neobanks,” explained D-Rating. Some have thus managed to reduce the gap that was still significant in previous rankings from 2017 and 2018.

Even if digital technology makes it possible to reduce costs, it requires investments that require the right direction to be taken. “The digitization of banks generates a security issue that these operators cannot ignore. In its 2020 risk map, published in October 2019, the ECB presents “cybercrime and IT deficiencies” as one of the three main dangers currently facing the banking system,” recalled Xerfi in his study on the banking market in France.

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(Featured image by Floriane Vita via Unsplash)

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