This April, during the early days of the pandemic, I started a course in “FinTech and AI” (organized by Finovate and the University of Middlesex, given by dr. Christian Spindler) to
broaden and deepen my understanding of our industry. I am inspired to blend this theoretic
framework with my personal professional experience and to share some reflections.
The module introducing both phenomena makes transparent how FinTech has changed the building blocks of businesses’ success. Back in the old days, the ‘90’s of last century, when I started working in Financial Services, the success of our business was first and foremost defined by ‘economies of scale’. Scale and mass production ensured cost efficiency, securing exclusivity of customer relationships. Facilitating interbank payments at former Interpay / Equens, now Worldline, our customers, the Dutch banks had no option but to stay with us. Alternatives were rare and limited, switching costs very high, creating a two way lock-in for better and for worse.
In the first decade of this millennium regulators started opening up the market a bit for more competition. Roles in the payments value chain were separated. Schemes became independent from issuing, acquiring and processing. On the other hand regulation, trying to keep pace with innovation, created heavy entry barriers, thus playing an ambiguous role.
There I found ‘my business’ scattered all over the place. The role as scheme handed over to an independent organization, banks taking over our role as issuer and acquirer. Leaving us to facilitate the back-office processes.
The real game changer however is FinTech; drastically changing the game. Today business success is driven by ‘scale of data’. AI driven operational excellence replaces yesterday’s scale of assets. Customer experiences are tailored, connections digitized and retention benefits high.
The second module gives perspective to the new context of banks. As the traditional players, banks are challenged by non-Financial Services digital players and start-ups. And the challenge is all over the value chain: lending, mortgages, payments, you name it. In order to come up to par with a competitive data value proposition banks have limited options. To grow organically, which is easier said than done. To acquire high potential start-ups. Or …. to make way and die. How about that for a challenge! However, it is not all tears and sorrow. A large customer base, with ‘trust’ as the buzz word and deep pockets are not too bad as a starting point.
That said, the heavy burden of the core banking platforms makes banks envious of the newcomers’ clean sheet. Overcoming legacy in the Enterprise Architecture is one of the major challenges banks face. In order to make use of the tremendous potential of data (‘data / information is the new oil’) a modular architecture is needed. This certainly also applies to yesterday’s data warehouses, which are rigid, built on stable processes. FinTechs offer modules that replace and break up (elements) of the core banking systems. And today’s Enterprise Data Warehouses allows for iterative, ad hoc processing of raw data.
The traditional model, where one company does many activities, only using their own data, creates many inefficiencies. In the new game certain back-office activities, like fraud monitoring (optimizing false-positives based on your company’s risk appetite), are specialized commodities. They do not lead to competitive advantages and are easily outsourced to best in class ‘centers of excellence’. Enabling banks to concentrate on their core, creating efficiency gains making use of available data.
To quote Hong Kong based founder of unicorn WeLab (digital lending and banking) Simon Loong: “What do you need to beat the traditional banks in an industry where scale matters? It is not ‘money’ or ‘experience’ obviously. It has to be with ‘technology’ and ‘data’. And “We are in the era of the survival of the most adaptable.”
Being given the opportunity to validate in a forum of digital banking industry leaders: “What is the ONE thing traditional banks should learn from their challengers and vice versa?” There is consensus among the panelists. Banks need to get rid of their legacy and become truly adaptive. “Don’t lose the mindset of the current crisis”. Challengers need to grow their regulatory capabilities and obtain the discipline to also manage their long term sustainability.
On the waves of competition and the inherent innovation I have been given the opportunity to work with many ‘new kids on the block’. I have facilitated several companies with the digitization of routine decisions, both for the boarding of new business customers (‘the sales journey’) as the support towards existing customers (‘the service journey’). Using an iterative and agile approach (build, use, learn, continuously improve) an end-to-end digital process is developed, cutting out all manual interference. Fully digitized processes result in a first-time-right, efficient, scalable and instant happy flow with an optimal customer experience. This too enables both banks and their challengers to concentrate their scarce resources on developing best in class value added services.
And so I learn some new commandments of successful business operations. Concentrate on the problem you want to resolve. Start small and scale up fast. Design on what you need, not on what you have. Decrease complexity. Be as open as possible about solutions. Be as open as possible to resolve the problem at hand.
Overlooking the ballgame, what a ride it is and what else to conclude:
“What fun and how rewarding it is to create value together!”.