Fintech firms are making substantial inroads into the banking industry, according to Capgemini’s World Retail Banking Report 2016. After surveying 16,000 banking customers in 32 countries and interviewing 140 industry executives, the consultancy concluded a tipping point is imminent as fintech firms win overwhelming favor with customers while only 16 percent of customers like their bank enough to buy additional products from it. Banks face a real challenge with younger customers — in North America, only 47.7 percent of Gen Y customers reported positive experiences, compared to 62.5 percent of Gen X customers and 75.7 percent customers of other age groups.
“Twelve months ago when we interviewed bank executives, the biggest threat they mentioned was fintech, said Bill Sullivan, head of global financial services market intelligence at Capgemini Financial Services, “but they didn’t expect that to happen for three years. The speed of change has been incredible. While fintechs are not taking great market share, they are clearly filling gaps the banks have left wide open for many years.”
Capgemini’s report notes that customer experience has risen 2.9 points since last year, but profitable customer behavior has improved only marginally.. Nearly two-thirds of bank customers are using some products or services from fintech firms, and 88 percent say they trust their fintech providers somewhat or completely. They are much more likely to refer friends to their fintech provider (54.9 percent) than to their bank (38.4 percent).
After the financial crisis, said Sullivan, financial firms focused on regaining trust and complying with regulations, leaving the customer experience a secondary priority. Meanwhile firms outside banking, such as Amazon, Facebook and Uber, were raising customer expectations. When some fintech firms began delivering Wow! moments, some leading banks started to react, although others have their heads in the sand, he added.
“Banks still struggle with legacy systems and with their culture.” One European bank partnered with a fintech firm on a project. Eighteen days later the technologists had a app and a proof of concept, while the bank was still struggling with deciding who should be in the room to meet with them.
Interviews with bank CXOs revealed some startling contrasts with some large banks realizing the need for change while some regionals and super-regionals don’t think fintech innovations will impact them.
“Banks are underestimating the value fintech firms provide in delivering a good experience and efficient service, as well as their potential influence on all areas of banking,” the report said. “From the customers’ perspective, fintech firms have value in being easy to use (81.9 percent), offering faster service (81.4 percent), and providing a good experience (79.6 percent).
“I haven’t yet seen a bank that has figured it out,” Sullivan added. “We see two types — banks that understand what is happened but haven’t figured out the solution and others still in denial. In Europe there is a broader awareness of what is happening globally and where leading practices are taking place.”
A Turkish bank developed an entire branch within Facebook five or six years ago while many American bankers didn’t believe something like that would ever happen, he said.
Banks that do acknowledge they have a problem have a choice of responses. Some have chosen to invest or collaborate with fintech firms, and many have developed an incubation tool linked to an in-house technology team. Buying fintech companies has not proven attractive to many, he added.
“It’s too early to say which is the right approach.”
Legacy core systems using old mainframe technology and siloed by product, are one of the key obstacles to better customer experience.
“The vast majority of banks (87.1 percent) believe their infrastructures are not adequate to support the digital banking ecosystem of the future, giving momentum to the increasingly aggressive competition from fintech firms,” said the report. But replacing them is so expensive and risky that most banks have decided against that, Sullivan said.
“We are seeing pragmatic bite-size pieces where they are trying to solve specific challenges.” The role of data will be key to an improved customer experience, and will go from nice to have to being the only way to deliver a customized experience.
Some of the strengths perceived by bank executives may actually suggest an underlying weakness, according to the report.
“For example, though banks have a wealth of customer data, they have not optimally leveraged it, resulting in only 56.4 percent of executives counting it as a strong point. Over the long term, current bank strengths may not hold up against the appeal of the growing numbers of tech-savvy fintech firms. The new firms leverage advanced analytics to analyze customer behavior in support of targeted marketing, and use cutting-edge technology to develop innovative products, while delivering superior customer experience and passing along savings to end-users.”
Compliance and regulatory pressures have been a challenge, Sullivan said, but they can also be an opportunity for innovation, especially in Europe where regulators are taking a more proactive role and creating an environment that supports innovation.
“We are seeing more engaging dialogue with regulators in Europe.”
This article was written by Tom Groenfeldt from Forbes and was legally licensed through the NewsCred publisher network.
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