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Fintech 04 Sep 2018

In the face of digital disruptors, will banks exist in the future?

Amid increasing numbers of fintechs joining the financial industry and burgeoning investment in them – Accenture reports $27.4 billion was spent financing fintechs in 2017, an 18 percent increase year-over-year – there has been much hand wringing and discussion about the future of incumbent banks. For BBVA Compass Head of Business Development Pepe Olalla, the future isn’t so murky.

“When people say the next industry to be disrupted will be banking, and that it will suffer what media or the music industries have suffered, I tend to disagree,” he says.

What Olalla doesn’t disagree with are the oft-quoted stats that demonstrate the impact that fintechs are having on traditional financial services companies. Even so, he draws an important distinction between the disruption of an industry, versus the disruption of the industry’s product.

Olalla: It’s true that there are many startups disrupting banking as we know it today. But, when you look at what happened with other industries that suffered catastrophic disruption, it’s not the industry itself that was disrupted, it was the product.

“It’s true that there are many startups disrupting banking as we know it today,” he says. “But, when you look at what happened with other industries that suffered catastrophic disruption, it’s not the industry itself that was disrupted, it was the product. Somebody invented an alternative product, like photography where digital has largely taken the place of film. We have thousands of startups, but all they are doing is offering the same type of products in a different way. So far, there is no alternative product out there.”

Beyond the distinction of industry versus product, there are other reasons to believe that traditional banks that adapt to changing customer needs and preferences are here for the long term. Below are a few of them.

The consistent increase in collaboration between banks and fintechs.

According to PricewaterhouseCoopers’ (PwC) 2017 Global FinTech Report, 82 percent of survey participants expect to increase FinTech partnerships in the next three to five years. While PwC indicates that these partnerships allow incumbent banks to accelerate innovation plans, it’s also true that many fintechs need banks for their regulatory expertise, full balance sheet and to leverage the trusted advisor reputation they’ve built with consumers over the course of many years.

Banks hold the customer relationship.

While their reputation with customers admittedly took a hit during the recession, banks continue to be the primary holder of the customer relationship, including the all-important deposit account. Indeed, without charters of their own, many neobanks must rely on federal or state chartered banks for their depository services.

Beyond supplying the backend to some fintechs, traditional banks have also spent years developing deep relationships with customers, a factor that is important for continued profitable organic growth. It is less expensive for banks to acquire and retain customers than it is for a fintech. As this article from Tearsheet.co says, many top banks have been around for decades resulting in a large existing set of customers and streams of data on them. Startups, it says, don’t have the customer base or the scalability banks boast.

Big data is…a big deal.

Finally, data is another key differentiator for traditional banks. As BBVA Compass Data Portfolio Director Michael Taylor says in ‘What makes Big Data big,’ banks have always possessed a great deal of information that consumers provide to them as part of routine interactions. Now, with banks becoming savvier to the impact of data on customer experience, they are finding ways to use it to understand behavior and support customers throughout their financial lifecycle. This makes sense according to Olalla, who says that successful banks will be those that are involved in helping people make the right financial decisions through the smart use of data.

Olalla: Of course there won’t be 6,000 banks in the U.S. ten years from now, but banks won’t disappear. I don’t see anything today to support that prediction.

“It’s not easy to compete against incumbents when you come in with the same products”, says Olalla. “Of course there won’t be 6,000 banks in the U.S. ten years from now, but banks won’t disappear. I don’t see anything today to support that prediction.”

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