Banks must pal up with fintechs in a more strategic way to help reach out to new clients and transform front-, middle- and back-office processes, or they'll be left on the sidelines. The coronavirus crisis puts the need for digital innovation under a sharp spotlight, the report says.

Banks have yet to grasp why they must adopt an “open platform” approach in order to grab the benefits of fintech and avoid getting crushed by new players, a report from Capgemini today says.

With new digital channels for financial services likely to accelerate further because of the COVID-19 pandemic, the 36-page report examines how banks such as Commerzbank, BBVA, Goldman Sachs, Bank of Montreal and Santander have become “Inventive Banks”, partnering with fintech firms to gain market advantage. The report said that financial technology firms have moved beyond the “disruption” phase to being more established parts of the industry landscape. 

“It’s time to consider them [fintechs] as tangible competitors or enabling partners. Last-mile customer experience may be the visible result of inventive banking, but middle- and back-office operations are critical for CX [customer experience] too,” the report said.

Big Techs such as Amazon, Google, Facebook and China’s Alibaba are already part of the financial technology space in some ways, or are looking to push into the area. Unencumbered by some of the legacy costs and reputational issues of banks, such firms are sometimes seen as being able to disrupt the sector and grab market share. (See an article on this trend here.)

“Inventive banks can leverage their reach, trust, and business expertise to optimize their assets and remain relevant to an increasingly diverse customer base. This is especially important given the highly uncertain economic outlook caused by never-seen-before risks,” the report said, making an indirect reference to the coronavirus pandemic.

Fintechs threaten incumbent banks because they can deliver the kind of personalized, real-time client experience that younger tech-savvy clients take for granted, the report said. 

“Non-traditional firms have been tackling some of the pain points customers face with incumbent banks. For instance, Big Techs and challenger banks such as N26 offer KYC and onboarding with a fully digital and seamless customer experience; and that is pushing banks to rethink, revamp, and reshape their customer journey,” Laurent Herbillion, director, open innovation at BNP Paribas, was quoted as saying in the report. (N26 is a challenger bank in Berlin, Germany.)

The report, for example, noted the main reasons clients give for using a non-traditional financial services provider: Some 70 per cent said they liked the low-cost offerings; 68 per cent liked ease of use; 54 per cent wanted the faster service, and 39 per cent wanted the personalized products.

Noting cases of incumbent/fintech partnerships, the report referred to how London-based Revolut collaborated with New York-based Currencycloud, a business serving cross-border currency clients. Another case was of Commerzbank’s partnership with IDnow, a German firm using machine learning to verify customer ID. Other examples given were BBVA in Mexico partnering with ride-hailing platform Uber to handle real-time debit card payments, and Goldman Sachs adopting technology to extend loans to small- and medium-sized firms over Amazon’s lending platform.

The Capgemini report looked at 59 banks and found four broad “types”: “Dawdlers”: Unpreparedness in readiness a key reason for not being successful; “Race to nowhere”: Banks having overall readiness but did not achieve success; “Outliers”: Exceptions, where collaboration success was achieved without substantial efforts on overall readiness, and “North Star”: High preparedness in overall readiness a key reason for achieving success.

The study also notes that a lot of digital partnerships involving banks can focus on the front-office side. However, banks must use technology more effectively to make middle- and back-office processes more efficient.

The report noted that more than two out of three bank executives surveyed were disappointed by the collaborative open banking programs they put in place. A problem was that strategic priorities and key performance indicators did not fit. Three-quarters of executives said they failed to get productive results from collaboration.