Largest Threat to Banks Is Becoming Regulatory Infrastructure

Fintechs continue to eye growth and go “mainstream” by utilizing the financial and regulatory infrastructure from more traditional and legacy banks. However, Reuters reported that the U.S. Central Bank and the Federal Reserve worry about sharing this infrastructure with FinTechs such as OnDeck Capital and Kabbage because the partnership places the bank “at odds with other regulators looking to bring [those firms] into the fold.” According to the Fed, there aren’t enough protocols around risk management in place yet to give FinTechs comprehensive access to payment systems and transaction settlements. In fact, St. Louis Fed President James Bullard was quoted telling Reuters that FinTechs, “probably do want access to the payments system, but they don’t want the regulation that would come with that access. I am concerned that FinTech will be the source of the next crisis.” Yet, legacy banks are feeling the pinch of the FinTech threat.

Traditional banks struggle to meet the demands of the digital era

Banks have their own strengths, including being in the business for centuries and having associations with and access to customers and their data. But they are hamstrung by legacy systems, stifling regulations, and an inability to explore the true potential of emerging technologies due to lack of expertise and cultural inertia regarding change.

Invariably, legacy banks do have their share of dominating strengths such as some being in this industry for centuries along with their access to clients and customer data. Unfortunately, they are also befuddled with a highly-regulated environment, legacy systems, and the lack of necessary expertise to advance their businesses using the latest technologies and digital platforms. As a result, they are hamstrung with inefficient and time-consuming processes which increase the costs of doing business and negatively impact the customer experience. In addition, the lack of innovation puts them behind FinTechs who are driven to capture the hearts and minds of tech-savvy customers with new products and services fueled by the inevitable power of automation. 

Unquestionably, FinTechs have made their presence known and many have a gaggle of celebrity investors who only add to the allure of “disrupting” traditional banking. 

When will the FinTech domination occur?

According to Gartner, only 20% of traditional banks will survive by 2030. So then, Gartner is predicting that 80% of legacy banks will either become commoditized or simply disappear. Heritage firms who wish to overcome the FinTech upheaval need to adapt and incorporate automation throughout their processes otherwise they will stop making history and become history.

The attitude of legacy banks feeling safe because they have been “safe” for centuries is a dangerous way to get blindsided. There isn’t a time in history where technologies have upended traditional models throughout every industry as quickly as we have seen today. The change digital technology brings to banking is here to stay. Currently, you can execute smaller trades with smaller banks and FinTechs. To execute a large trade, you need to partner with a large bank –  to provide liquidity and other services. But, how long can financial services bank on this position in the battle for market dominance?

Right now, there are too many banks with way too much capacity. FinTechs will forge ahead and get bigger, while the “dinosaur” banks will have to adjust their processes and rapidly determine what they need to do to remain competitive in a digital world. Monolithic, and disparate legacy systems are no longer efficient enough to address evolving customer demands and expectations.

Losing market share

In specific segments such as commercial lending or even equipment leasing, Accenture has found that FinTechs have already taken around 4% market share from traditional banks. This is a potent strategy for attack where FinTechs can corner segments of the market and then expand to new segments. 

In terms of consumer banking, traditional banks still have a foothold, but they are losing ground as an increasing number of new consumer accounts are opened with FinTechs such as SoFi or Prosper that also offer student lending, personal lending, and small-business lending. For the most part, traditional banks have given up market share of the niches and basically handed them over to FinTechs. It’s similar to how Walmart saw Amazon as a niche player until it was almost too late. Although, some banks including BBVA Compass, HSBC, and PNC Financial Services Group have seen the writing on the wall and now offer all-digital consumer banking products and services. 

With the personal loan market estimated around $120 billion, there is much upside for FinTechs and traditional banks have a lot to lose if they don’t quickly improve their digital footprint. 

Another area where FinTechs have found success is in mortgage origination. Quicken is now the market leader in U.S. mortgage originations. To be fair, traditional banks did not fight back as hard to maintain leadership in this segment since mortgage origination is not considered one of their most profitable services.

FinTech strengths 

There isn’t any question that FinTechs find their strength in usage of emerging technologies to address inefficiencies in financial services and functions and to meet the needs of mobile-first and impatient customers. These API-driven technologies have spurred enough innovation to attract customers away from legacy banks and still keep costs affordable for their target market. Moreover, FinTechs have taken advantage of financial services segments that are not hamstrung by regulations or outdated legacy systems. They result? Many have been able to create a better customer experience with quicker turnaround times and service. Many FinTechs also infuse technology into their culture so that they are tech companies rather than “banks.” 

In the year of COVID, many customers don’t want to deal with the hassle of providing salary pay stubs, credit histories, or visiting a bank branch to open an account. People are texting, and they want to have the ability to use SMS to transfer and receive money. FinTechs are becoming quite adept at combining a customer-forward approach with emerging technologies. 

Blurred lines

For some banks, there is a light at the end of the tunnel. For starters, API-driven automation can be used to replace time-consuming, rules-based, and manual processes. Also, with a swath of new regulatory developments, FinTechs are pursuing increased collaboration with traditional banks and vice-versa. The advantage is FinTechs can expand and address regulatory requirements across the states and traditional banks can remain relevant. 

Competition is expensive, coopetition is much more advantageous for both sides. Legacy banks might have bigger budgets and customer access while FinTechs bring the new technologies, innovation, and consumer-driven culture. So then, collaboration becomes a win-win and traditional banks can offer new products and services. Even technology-averse banks can benefit from a strategic FinTech partnership.

Final thought

For the next decade, the biggest obstacle for traditional banks will be around comprehensively embracing a digital transformation and automation. Unquestionably, legacy banks must address evolving consumer needs and implement technologies that save both time and overall costs. If you want to learn how automation can help your bank succeed past the year 2030, ProcessMaker is here to help.