Banks and Fintechs Are Changing the Way Banking Is Done

TO RESPOND TO NEW DIGITAL PLAYERS, BANKS MUST RETHINK THEIR BUSINESS MODELS AND DEVISE COLLABORATIONS WITH THE NEW ENTRANTS TO THE FINANCIAL MARKET. THE MAIN ISSUE IS THE EMOTIONAL EVOLUTION OF CUSTOMER RELATIONS

by Anna Omarini, Dept. of Finance, Bocconi
Translated by Alex Foti


Digitization impacts the banking business fundamentally in two ways: on the one hand, it produces cost reduction and process efficiency through increased reliance on automation; on the other hand, the entry of new digital market actors such as fintech companies erodes certain traditional areas of the banking business, due to their superior technological expertise and greater appeal for consumers, so that they constitute an interesting alternative to conventional banking.

In this regard, it is notable that in the 2009-2016 period, fintech companies entered the market to reduce the supply gap existing between banks and customers, doing mainly unbundling of banking services, thus staying out of service provision to focus on specialization of their offer. Now, the situation has changed. As the market grows and deepens, an implicit demand for the re-bundling of services increases. That is, the time has come for reintegrating a fragmented offer, which over time had become overly complex for customers on the demand side. It is therefore in this new context that banks can seize the opportunity for change.

As everybody understands, this is a race against time. The key factor is speed, which refers both to how quickly the banks will be able to rethink themselves to take advantage of digitization without suffering its adverse effects, and to how they compete to take a leading role in defining the new environment. Lose, and they will find themselves in the situation of having to play with rules decided by others, and having to respond to strategies initiated elsewhere.

➜ The two possible scenarios
Therefore, there are two options available: an evolutionary option, in which digital will open new opportunities and growth prospects for banks; and a disruptive one, in which technological actors and platforms will dictate the pace and direction of change. In the first case, banks would move, as it is already happening, towards various collaboration frameworks with the new players, in order to maintain their centrality in market relations. In this case, the value sought by banks in these collaborations will be functional and emotional, while expanding a range of innovative services, so as to fill the bank-client relational gap. If that is the way, then credit institutions need to align more closely the long-term horizon of reputation and trust with the short-term of view shareholders and markets.

âžœCollaboration models
A for the first scenario, there is a wide variation of frameworks for collaboration, either expected or observed, between banks and fintechs, in terms of for strategic motivation and development philosophy. We can see that the main international banks are taking several initiatives on this front. Coming to the Italian market, the Bank of Italy has reported that most of the country’s banks have begun to develop, prevalently in-house, digital innovation projects; collaboration with suppliers, through the exploitation of potential synergies with fintech companies, including internal incubators and accelerators, is still limited. As for the second option, native technological platforms, which by their nature act as facilitators and integrators of trading systems, will develop their business around so-called checkpoints (payments, social networks), which will represent the new critical factors for success.