Four ways that banks and fintech providers will look to gain customers, innovate faster, and improve their digital offerings in 2016.
2015 saw a flurry of activity in the fintech sphere. Tech giants and fintech startups alike are now firmly invested in pursuing the opportunities for disruption presented by emerging technologies. Banks are in turn focusing more efforts and resources on these emerging technologies to deliver the customer-centric experience that the industry has talked about for years.
Technology players are creeping into several business lines – payments, small business loans, and wealth management, among others – but high regulatory hurdles mean their easiest path to growth is often partnering with banks. This is good news for banks struggling with the pace of innovation in technology thanks to high regulatory costs, expensive branch networks, and outdated organizational silos and legacy systems.
This has created a convenient but uneasy status quo where banks and fintech companies need to partner even though the technologies fintech companies provide could completely disrupt banks’ customer relationships down the road. This status quo will remain the same in 2016, but with a twist:
Prediction #1: Bank and Fintech Partnerships Will Evolve Past Investments and Acquisitions
The largest banks have shaped the dominant model of bank-fintech partnerships. These banks have used venture capital arms to give fintech startups cash to get their ideas off the ground. If the startup’s product proves it has potential, then the large bank will consider acquiring it outright and bring its technology in-house.
In 2016, regional and community banks will look to gain their own inroads with the fintech world. These institutions don’t have the piles of cash to build venture capital funds (although they could band together to do so). However, they have other things to leverage for these partnerships, like existing relationships with retail consumers and deep regulatory knowledge. A smaller bank could use these assets to help startups test their products with the bank’s customers. If successful, that test can develop into a vendor relationship, giving the startup validation and an inroad into the industry.
Prediction #2: Middleware Will Diminish the Role of Core Systems
Banks desperately need to become more agile to keep up with the pace of change in technology. Partnering with fintech startups helps improve agility and responsiveness, but it’s only one part of the equation. Banks also need to make it easier for new solutions to plug into their IT infrastructure. This has long been a challenge because of banks’ complex, outdated core systems that they have been hesitant to upgrade in recent years. Tying new solutions into these aging core systems is time-consuming and slows down the deployment of new products and services.
In 2016, the industry will move away from its reliance on core systems and start using middleware that serves as a communication layer between core systems and the rest of a bank’s software solutions. The middleware layer will make it easier to plug new products and services into the transactional data housed in core systems. It will also relegate core systems to a less significant role. By 2017, core systems will become little more than transactional databases that other applications query for information. Large banks and core solutions providers alike are already developing middleware that will remake their core solutions into transactional databases, and we will start to see the benefits of these efforts by the end of next year.
Prediction #3: Mobile Wallets Will Compete On Marketing
Big banks have started rolling out their own mobile wallets, and more of them will follow suit next year. Some national retail chains are also joining in the mobile wallets competition. Although the major mobile technology providers beat the banks and retailers to the market with their solutions, that doesn’t mean that they will dominate the mobile payments market going forward. Many consumers who have the ability to make mobile payments don’t know where or how to do so.
Banks and other wallet providers will need to figure out how to educate their customers about their offerings to compete. Retailers, for instance, can use beacons to notify customers in their stores that they can pay with the retailer’s mobile wallet, and send them a coupon incentive to do so. Banks and other providers will also have to leverage mobile notifications with contextual offers to encourage mobile wallet adoption. They will also need to find ways to show customers how to actually make a mobile payment. For instance, when someone opens the wallet app for the first time, it could launch a short video demonstrating how to make a payment with the app.
Prediction #4: Banks Will Start Leveraging Blockchain Technology
2015 was the year of experimenting with the blockchain. 2016 will be the year when banks start taking their blockchain experiments out for a spin. That may not lead to a customer-facing product built on the blockchain, but there are a number of internal use cases for blockchain technology that banks have been experimenting with. Some of these experiments will see limited rollouts next year that could be expanded to other teams or applications if a limited release proves successful.
Banks will likely use the blockchain for tasks that don’t actually involve money to avoid regulatory scrutiny. Instead, they will use blockchain technology for tasks like authentication with internal applications or verifying internal documents. For a limited rollout, a bank could start by authenticating applications or verifying documents that are the least vital to the banks’ customers or business. After a few months with no hiccups, the rollout could expand to include more significant items.
The blockchain’s biggest impact on banking will be in handling money; it could save the industry billions in clearing and settlement costs. But this new, disruptive technology will need to be proven with tasks that don’t directly touch customers’ money before the industry and its regulators can allow it to perform the functions it was invented for. In this way, 2016 will be critical for proving that banks can trust blockchain technology to do what it was originally intended to: move money.
For banks to avoid the status quo in 2016, they will need to devise a course of action that will enable them to take advantage of the changes that are happening and will undoubtedly continue to happen. Nothing is going to stop velocity of change except to participate in the change.
Paul Schaus is the president, CEO and founder of CCG Catalyst, a management consulting firm offering strategic advice to banks. Contact him at PaulSchaus@ccg-catalyst.com or 1-800-439-8710 ext 201. Follow CCG Catalyst on LinkedIn and Twitter.Like This Post