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Why traditional banks still outcompete FinTechs

Valérie Gitenay
Valérie Gitenay
consultant in strategy and transformation, expert in the banking sector and engineer from Telecom SudParis
Key takeaways
  • The retail banking sector did not wait for the arrival of neobanks (also known as online banks or internet-only banks) to begin its digital transformation.
  • It was after 2008 that the transformation accelerated, when the collapse of interest rates reduced the return on loans. The sale of other services became increasingly important.
  • Platformisation and data enhancement are the two rising trends: banks are trying out new businesses.
  • In parallel, the banking business is being taken over by a myriad of players, not only digital players.
  • But with the complexity of core banking and the difficulty of making small customer bases profitable, traditional players are protected by high barriers to entry.

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

Contributors

Valérie Gitenay

Valérie Gitenay

consultant in strategy and transformation, expert in the banking sector and engineer from Telecom SudParis

Valérie Gitenay, after studying telecoms engineering, began her career in banking in the telecoms sector and then in payments and e-commerce. She later joined Ernst & Young and then Capgemini Invent as a consultant. During her career, she has managed numerous transformation programmes in the banking sector, such as the evolution of networks, digital transformation and merger and rationalisation operations. She is also specialised in the evolution of the retail banking model in the era of data and open-banking.