Capgemini and Efma’s 2020 World FinTech Report hints that banks just may be going into extinction very, very soon if they aren’t able to embrace new technologies – namely, Open X. Moreover, this possibility of premature extinction is also sped up by the unexpected COVID pandemic.

As the banking industry ushers into a new period, banks and FinTechs will have to look to each other for support as they both navigate their way into the new age of Open X, especially after one of the most dramatic economic crashes in history.

 

The Challenges Banks Face

According to the report, there is a widening gap between what traditional banks offer and the customary of what customers expect. Big Tech companies and bank alternatives undoubtedly have an edge over regular banks in how they can offer data-fueled, hyper-personalized experiences in real-time. Banks, on the other hand, remain to lag behind in offering these specialized services.

Despite pouring huge sums of money in new IT infrastructure, increasing investments from 24 per cent in 2016 to 33 per cent in 2019, most traditional banks’ middle-end to back-end operations remain to be complex and often manual processes, making for fragmented customer experience. 

For banks to speed ahead of the curve, they must transform into agile and customer-centric inventive banks with Open X, as well as take on a more specialized role rather than a universal one. In other words, banks should aim to play supplier or aggregator within this shifting and open environment. 

 

The Impact of COVID-19 on Banking

As we start to embrace “the new normal,” transactions requiring no physical exchange become more and more the norm. This is because the virus can live on banknotes for days, and the World Health Organization advised people to do contactless transactions as much as possible.

Today, banks, consumers, and governments are weighing the risks of in-person banking and opting for digital channels where possible. 

The U.S. Federal Financial Institutions Examination Council called for “increased reliance on online banking, telephone banking, and call centre services” in addition to remote working to accelerate this shift, ordering banks to prepare their online systems’ capacity to handle increased digital banking needs. 

These encouraged protocols might give FinTechs an edge over banks at the moment, given the wider range of services that they offer in comparison. This will also drive banks to accommodate more cashless online banking services, so banks should expect a spike in demand for cashless transactions from this point on.

 

Banks and Fintech: Problems with Collaboration 

Banks and FinTechs need a structured collaboration for both parties to thrive, with the former’s strength being in structure and the latter, agility. However, both banks and FinTechs remain frustrated by the lacklustre results of their collaborations to date.

According to the report, only 21 percent of banks say their systems are agile enough for collaboration, and only 6 per cent say they have achieved the desired ROI from collaboration.

Seventy per cent of FinTechs say they do not see eye-to-eye with their bank partners on a cultural or organizational level, and more than 70% of FinTechs say they are dismayed by the incumbent’s process barriers. Half of FinTech executives also say that they have not found the right collaborative banking counterpart. 

The problem seems to be that the fabric within most banks’ organizational structures are sewn together so well that banks find it hard to add new processes into the picture. With that being said, inventive banks that are willing and capable of tearing down areas of their structure to make way for new ones have the biggest opportunity to prosper within the shared Open X ecosystem.

 

What Banks Can Do

To prosper within this new ecosystem, banks need to prioritize middle- and back-end transformation through data-driven and customer-centric partnerships with FinTechs. Banks need to simplify outdated, often complex business processes and let go of their manual transactions to allow for overall better customer experience. 

Focusing on middle- and back-end processes will ultimately improve the front-end as a domino effect as well. Banks particularly seem to miss the mark on the last mile, with regards to packaging and delivering products to customers. Fifty per cent of customers say they feel they do not have a “personalized” relationship with their bank, and 60 per cent say they are not able to make direct-debit payments on several merchant sites, according to the report.

Also, 48 per cent of Gen Y and tech-savvy customers say they are frustrated with the narrow range of services provided by their traditional bank, causing them to opt for bank competitors such as FinTech companies that offer services more suitable for their needs. 

Fully fleshing out the gamut of the chain from back- to front-end services will allow banks to adapt to an Open X environment, as well as improve top- and bottom-line growth, increase productivity, serve customers better, reduce costs, increase transparency, and generally boost employee satisfaction.

 

What’s Next?

The 2020 World FinTech Report says that frontrunning banks will be those that have a dedicated and autonomous startup-partnership team. They will also be the ones who can demonstrate an innovative approach to determine value to cut losses immediately. 

Banks also need to lessen their dependence on legacy systems, not only to allow them to work on transforming their back-end and middle-end services but to make FinTech integration easier as well. If banks choose to stick with their outdated processes and ignore the Open X wave, they run the risk of becoming irrelevant soon, says Efma CEO John Berry.