BankTech: Revolutionizing Traditional Banking with FinTech Innovations

The last decade has seen the payments landscape experience seismic change. This change came in several forms, the more notable thereof being the emergence of FinTechs, the introduction of alternative payment methods, an increased use of digital wallets, a decreased reliance on cash and an increased adoption of person-to-person payments.

This begs the question, with all this change afoot, how are traditional financial institutions positioned to respond and innovate? A good starting point is to unpack what has enabled the change in the merchant and fintech space.

A strong focus on technology

“Engineering is the closest thing to magic that exists in the world.” – Elon Musk

The growth of merchant retailers and FinTechs has been unlocked by their ability to adopt modern technology stacks and associated approaches to service delivery. The organization can focus their engineering efforts on the important bits, namely the business offering that will differentiate it. Additionally, standardization of interface approaches has resulted in more connected applications and services, with less concern about such integration. The implication is that there is a large body of services and applications that can rapidly be assembled to deliver a solution.

An additional benefit is that the deployed code base has an inherent maturity afforded to it by virtue of well used and tested common infrastructure, in lieu of net new development. These frameworks, combined with cloud infrastructure and tooling provides the key constituents for rapid innovation and service delivery at a lower risk and CapEx than was previously possible.

How have merchants harnessed modern technology?

In recent years, merchants have drawn closer to their customers. Merchants now have a direct relationship with their customers via the ecommerce channel and mobile app. It is important to consider that the shopping experience a customer has with the merchant is typically one of positive affirmation. Buying the merchant’s products feels good. In contrast, when a customer uses the banking app, the reward cycle of transacting is likely lower. For example, making a loan payment or settling invoices is unlikely to generate the same dopamine hit that buying a new flat screen TV from your favorite online merchant will. Merchants provide goods and services we want. Banks provide services we need.

Furthermore, in recent years merchants have blurred the lines between merchant and payment provider. Services such as Apple Pay represent a shift of customer ownership toward the merchant from the card issuer. Apple is engaging with, and authenticating the customer, as well as obtaining visibility of the customer transacting profile across merchants. This represents close engagement with Apple and the edification of its brand, not the issuer’s. In response to this, some of the large issuers in the US are introducing paze, a competitive digital wallet to be used during online checkout. The challenge for paze will be to displace the well subscribed services offered natively by the likes of Apple and Google and convincing the merchants to integrate with another digital wallet.

What about FinTechs?

Much like traditional merchants, FinTechs have embraced modern technology stacks to introduce new services and payment methods to their expanding customer base. Consumers now have more choice than ever when selecting a payment method, which includes the likes of alternative payment methods such as Buy-Now-Pay Later. These brands and their offerings are direct competition to the issuer’s traditional business of providing payment products to its customers such as credit facilities.

The Federal Reserve recently launched the FedNow instant payment network. Faster payments is not a new concept in the US. The Clearing House’s RTP instant payment network, was first introduced in 2017. Usage of this network has not matched that of countries such as Brazil and India, where peer-peer cash transactions were common providing a compelling use-case for wide adoption of instant payments.

Adoption to date has been impeded by issuer uncertainty surrounding the monetization strategy and possible risk to interchange fee revenue. Additionally, the introduction of an instant payment capability within the bank is a complex project with several integration points. All back-office systems need to be migrated from a batched end-of-day cycle to an online 24/7 operation. This is a significant technological shift for the bank, and the introduction of automation and reduced friction during integration is a requirement for success. In short, it necessitates a transformation of the bank to an always online institution.

What is next for financial institutions?

“Once a new technology rolls over you, if you’re not part of the steamroller, you’re part of the road.” – Stewart Brand

Merchants and FinTechs have disrupted the financial technology ecosystem and increasingly become more bank-like in terms of the services they offer, whilst doing so on modern technology stacks. In response, modern financial institutions will need to engage their customer base with services they want, as opposed to just the services they need.

Banks should become more merchant-like, by investing in modern adaptive architectures that position the bank to innovate and deliver competitive digital services. Doing so will expand the service offering to their customers, unlocking new revenue streams whilst retaining and galvanizing the relationship with their customer.

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