Why traditional banks still outcompete FinTechs

The retail ban­king sec­tor seems to be more resi­lient than others in the face of new digi­tal players. Why is this ?

Ban­king has always been a tech­no­lo­gy-dri­ven indus­try and the sec­tor did not wait for the arri­val neo-banks to chal­lenge itself. In retail ban­king, the trans­for­ma­tion star­ted more than 30 years ago with com­pu­te­ri­sa­tion and dema­te­ria­li­sa­tion. Cus­to­mers were able to access basic ope­ra­tions direct­ly, such as trans­fers or cur­rent account consul­ta­tions. Digi­tal tech­no­lo­gy has also faci­li­ta­ted access to finan­cial savings and contri­bu­ted to the demo­cra­ti­sa­tion of the stock market.

Yet, this trans­for­ma­tion has rai­sed ques­tions like : do bank branches still have a pur­pose ? At first, the explo­ra­tion of digi­tal tech­no­lo­gy went hand in hand with an exten­sion of the branch net­work. They were not contra­dic­to­ry : in a busi­ness based on human rela­tions, the phy­si­cal net­work is impor­tant, par­ti­cu­lar­ly for first contact. Branch net­works made it pos­sible to win over a cus­to­mer base and build up their loyal­ty. It is a logic has not disap­pea­red. And even if nume­rous ‘digi­tal’ banks have appea­red in the last ten or fif­teen years, none of them have real­ly repla­ced a local bank.

None­the­less, this new auto­no­my of the cus­to­mer in dai­ly ope­ra­tions has led to the evo­lu­tion of branches. The coun­ter-payer was repla­ced by advi­sors, some of them spe­cia­li­sed, whose role was to accom­pa­ny the cus­to­mer throu­ghout his or her life.

Until the 2000s, banks were able to invest in both phy­si­cal and digi­tal chan­nels. But in the wake of the 2008 finan­cial cri­sis there was a mas­sive switch to digi­tal. Why did this happen ?

This shift in invest­ment cor­res­ponds to a very rapid change in busi­ness model. Before the finan­cial cri­sis, the bulk of pay­ment was based on the outs­tan­ding amounts, which enabled cre­dit to be gran­ted. The bank made its mar­gin on inter­me­dia­tion, and its income the­re­fore depen­ded main­ly on the volume of outs­tan­ding amounts and their rotation.

After 2008, with the col­lapse of inter­est rates, the remu­ne­ra­tion of loans became very low. The inter­me­dia­tion mar­gin fell shar­ply. To rebuild their mar­gins, banks played on two fronts : redu­cing costs through digi­tal tech­no­lo­gy (given that the revenue/cost ratio was his­to­ri­cal­ly very low in this sec­tor) and sel­ling products.

Retail banks have the­re­fore star­ted to sell dif­fe­ren­tia­ted ser­vice packages, espe­cial­ly to a “mass affluent” clien­tele that is not rich enough for pri­vate banks, but is willing to pay for pre­mium ser­vices such as Gold or Pre­mier cards. The banks are trying to sell advan­tages and pri­vi­leges : spe­cia­li­sed advi­sers, ticke­ting. They are also thin­king about rewards : infor­ma­tion, trai­ning, events on finance or sus­tai­nable deve­lop­ment, mee­tings bet­ween peers.

Is the wealth of data avai­lable to them use­ful here ?

Yes, data is cru­cial : but banks still exploit this wealth very lit­tle, even though they have data­bases that are both very large (mil­lions of cus­to­mers) and very pre­cise (hun­dreds of tran­sac­tions for each one), much lar­ger than those of insu­rance com­pa­nies, for example.

Their his­to­ri­cal posi­tio­ning is that of a trus­ted third par­ty, which has confi­den­tial infor­ma­tion and keeps it. But this could change, under pres­sure from Fin­Techs (digi­tal start-ups in the finan­cial sec­tor) which do not have these concerns. In par­ti­cu­lar, banks could exploit this data to bet­ter serve their own cus­to­mers, but also sell (ano­ny­mi­sed) mar­ke­ting insights to other industries.

They could also contract with their cus­to­mers to pass on or exploit some of their data. This aspect is only just emer­ging and, contra­ry to what one might think, the inter­es­ted cus­to­mers are not those with the lowest incomes but people belon­ging to the CSP+, who expect more effi­cien­cy and per­so­na­li­sa­tion thanks to the exploi­ta­tion of cus­to­mer know­ledge and the­re­fore of their data. These deve­lop­ments are visible in the Uni­ted States. In Europe, where regu­la­tions are stric­ter, banks are tes­ting and experimenting.

Ano­ther aspect is plat­for­mi­sa­tion, which enables them to enter the eco­sys­tems of cus­to­mer needs, as banks have alrea­dy done by pro­vi­ding insu­rance or tele­com­mu­ni­ca­tions ser­vices. Retail banks are par­ti­cu­lar­ly inter­es­ted in the eco­sys­tems of mobi­li­ty, health and enter­tain­ment. The forays into these eco­sys­tems are enabled by an enabling tech­no­lo­gy, the API. But inter­con­nec­ting infor­ma­tion sys­tems does not solve eve­ry­thing. They need to define the right stra­te­gic posi­tio­ning in worlds that are alrea­dy high­ly cove­ted and ensure suf­fi­cient sources of revenue.

The ques­tions a bank asks itself are which eco­sys­tems it can be an entry point into and, in the others, what are the right part­ner­ships to gain mar­ket share. It has a com­pe­ti­tive advan­tage that is not negli­gible : on the screen of your smart­phone today, you inevi­ta­bly have your bank’s application.

Aren’t Fin­Techs and neo­banks bet­ter equip­ped to enter these eco­sys­tem dynamics ?

They are more agile, no doubt, and both their mana­gers and their teams spon­ta­neous­ly enter into this logic. In fact, we are now seeing the rise of a myriad of players, inclu­ding not only digi­tal pure players : tele­com ope­ra­tors and insu­rers are also very present.

Howe­ver, in retail ban­king ser­vices, no major digi­tal players are emer­ging, and the sec­tor’s his­to­ri­cal players are doing quite well. There are seve­ral rea­sons for this. First of all, cus­to­mers still express the need to have a bank that is well esta­bli­shed, espe­cial­ly as banks have conti­nued their digi­tal trans­for­ma­tion : cus­to­mer feed­back shows that there is no major dif­fe­rence bet­ween banks and neo­banks in terms of experience.

Second­ly, we are not so much wit­nes­sing an uphea­val as a conso­li­da­tion : banks are buying the right Fin­Techs, fin­ding part­ners and inte­gra­ting them. This is in line with the mind­set of star­tups and the inves­tors who back them : they are most often loo­king for an “exit”, which in effect means either an IPO or a buyout.

Neo­banks often remain secon­da­ry banks, attrac­ting their cus­to­mers with tar­ge­ted offers such as eve­ry­day ban­king, forei­gn ope­ra­tions, micro-cre­dit… Those that have sur­vi­ved are often sub­si­dia­ries of tra­di­tio­nal banks. Neo-banks such as N26 or Revo­lut have not taken a large share of the mar­ket : we are far from the expo­nen­tial growth obser­ved in other sec­tors that have been sha­ken up by digi­tal pure players. It should be noted in pas­sing that the cus­to­mers of neo­banks are often “mul­ti-ban­ked”: they have accounts in seve­ral ins­ti­tu­tions. But these cus­to­mers are not easy to make pro­fi­table. The pro­fi­ta­bi­li­ty of a bank is no lon­ger rela­ted to the volume of its outs­tan­dings, but size still counts for a lot.

Howe­ver, in this high­ly regu­la­ted busi­ness, the mana­ge­ment and indus­tria­li­sa­tion of core ban­king are com­plex (core ban­king refers to all the basic soft­ware com­po­nents that manage the ser­vices pro­vi­ded by a bank to its cus­to­mers) if one wants to cover the dif­ferent clien­teles and the whole range of their needs. This is a for­mi­dable bar­rier to entry for newcomers.

Interview by Richard Robert