How Incumbent Banks can compete with fintech companies?

Posted by KMS Solutions on Oct 6, 2021 10:48:18 AM

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In the latest 2 years, banks are forced to constrict the number of branches and day-to-day operations. The pandemic has wrecked havoc on the industry's status quo. As customers find it impossible to access in-person their banks, they flock to fintech products. These challenger banks always offer a modern and more delightful experience, where customers are served wherever and whenever they are. According to a report by EY, 43% of customers said that COVID-19 has changed the way they use banking services. banks are now under substantial pressure to fight back.

Table of Contents

1. Adopt Mobile Banking

2. Watch out for the tech giants

3. Consider Fraud and Friction during the onboarding process

4. Assess whether to buy or build

5. Seriously invest in security

6. Open up

1. Adopt Mobile Banking

Mobile banking continue to be the major focus of the entire banking industry before and during the pandemic: a Mulesoft's report showed that 27% of consumers had thought of replacing their current bank with an online or mobile-only bank. What's more? the younger generations — those between 18 and 34 — were even more eager to switch, with 46% of them agreed that mobile-based banking services are more preferable.

Much like today’s consumers expect retailers to provide products through digital apps, banking customers expect an integrated and consistent experience across every channel, be it in-branch or in-app. They demand banking services personalized to their preferences that are accessible anywhere from their phone.

That's why banks cannot refuse to build banking apps, or else they will continue to lose customers to their peers and fintech companies. 

However, traditional banks often treat the mobile experience as a translation of their web experience. Meanwhile, challenger banks are taking a mobile-first approach to every product they release. Every touchpoint across the journey is designed with mobile users on top of mind.

What banks need to do:

  • Embrace mobile-first when it comes to building new experiences and products. 
  • Adopt design thinking to build a product that's customer-centric

2. Watch out for the tech giants

It seems that when talking about new banking challengers, people only mean agile tech startups and neobanks. But there’s another threat that traditional banks must keep an eye on. Those are tech giants. Recently, we saw Google, Amazon, and Samsung joined the digital banking space with Google Pay, Amazon Pay, and Samsung Pay respectively). These tech goliaths, with their huge tech resources, can deliver new banking innovations within a very short amount of time, integrating financial services into their already wide product offerings. 

These tech giants also have a big advantage when going into banking. That is their unrivaled reputation. They are so reputable that every product they release is perceived to have excellent quality. Unlike other fintech startups that are still jiggling between product and marketing, tech giants are so trusted that every move they make is newsworthy.

What banks need to do:

  • Centralize innovation programs on mobile-first technologies to quickly attract and easily onboard customers from their phone
  • Integrate seamless banking experience across all touchpoints, be it mobile apps, in-branch, social media, etc
  • Launch new digital banking products or partner with tech companies to enable new innovation

3. Consider Fraud vs Friction during the onboarding process

Banks are willing to spend millions of dollars on marketing to get customers to download their application, only to have up to 63% abandon the onboarding process due to frustration. That’s why the onboarding stage of an app, where the first impression is determined, is so important. 

On the one hand, an intuitive interface and a minimal number of clicks are critical to ensure user experience. But on the other, the app must be sufficiently designed to prevent fraudsters. Balancing between user experience and security remains the challenge for onboarding.

Modern eKYC solutions can keep friction to the minimum through fraud deterrence before fraud detection. It lets users onboard by taking photos of their IDs and selfies to verify their identities. Fraudsters are also kept at the bay thanks to Machine Learning and Artificial Intelligence

What banks need to do:

  • Calculate the number of clicks and total time it takes users to complete the onboarding, which is one of the most popular strategies for designing UI/UX in banking apps
  • Look for the points where users are likely to abandon the process, and then find ways to reduce that friction
  • It’s better to prevent fraudsters from ever being processed in the first place, then design ways to deter fraud before detecting it.

4. Assess whether to build or buy

There are typically two approaches when it comes to new technology: buying a solution from a third party, or building a new one from scratch. While developing a homegrown gives banks full control of the technology and the limitless ability to customize, it can be quite costly and time-consuming. Typically, building a product can take anywhere from 12 to 18 months. Moreover, banks typically lack the in-house talents to build new software, so they will need to engage outsourcing services for the additional resources, which is not cheap. In general, products that require continuous updates and customization, such as an application, should be built.

On the other hand, since most pre-built products are ready to use, banks can just "plug" them and "play" them. But banks may find the customization is also important. Typically, technologies that serves only one or a couple of purposes, such as eKYC or customer data platform, should be purchased.

What banks need to do:

  • Both the buy and build have ongoing costs of developing new features and maintaining. You should carefully evaluate both
  • Consider the opportunity cost when you wait for a new product to be built in-house, compared to when you buy it off-the-shelf.

5. Seriously invest in Security

Banks handle millions of transactions day-to-day. Most of them are now done digitally via apps. This makes banks a target for cyberattacks. For example, a case of a data breach can result in not only financial loss and tarnished reputation, but also in penalties, such as those of FDIC

Whether banks buy or build a new product, they must have measures to strengthen their security. Make sure you do a full security audit of any solution you build or buy, well before any of your customers use it

What banks need to do:

  • When you buy a solution, find out how the vendor ensures your customers’ data is protected. Remember to learn how long they will store your data, if they encrypt data in transit or at rest, and the security certifications they have.
  • When you build your own product, you must be fully prepared to comply with regulations such as GDPR and CCPA 

6. Open up

Open banking is another area that attracts the attention and investment of banks. Though it challenges many banks' status quo, Open Banking has the potential to help banks embrace digital transformation.

Open Banking requires banks to strategically make their customer and operational data accessible, at the same time ensuring regulations are complied. Though this may seem like a sacrifice, banks will be able to establish partnerships with other third-party service providers and leverage their innovations to enrich their offerings.

What banks need to do

  • Build secure but simple integrations with their partners' product: platforms, applications, or APIs.
  • Be willing to give up the parts of their business that no longer generate values

Conclusion

While fintech companies will continue to be the major threat of traditional banks, they prompt banks to innovate to serve customers better and invent ways to improve their efficiency.

If you are interested in Digital Banking, you wouldn't want to miss Buy Now Pay Later - now a prevailing trend in the BFSI landscape.

Buy Now Pay Later: A New Payment Trend

Topics: Digital Banking