Can financial service incumbents bridge the technology gap?

Worldwide, the evolutions in technology are accelerating exponentially. Almost every day, new technologies are discovered, and new products are released.

This trend will accelerate even more, as:

• People all over the world are becoming more educated, allowing more people to participate in the advancement of science and technology

• Companies realize more and more that the only way to compete is to innovate. This means that budgets spent on research and innovation increase year over year.

• The development of countries like India and China (each with more than 1 billion inhabitants), provide an almost unlimited pool of qualified resources

• Several tools support the advancement in R&D, e.g.

  • The internet allowing easier sharing of ideas, easier communication, reducing travel time…​

  • Open-source initiatives: started in the software industry, this new way of collaborating is gradually extended to other domains e.g.

    • Open Compute Project: an open source data center and hardware architecture, launched by Facebook

    • BiOS: in the biotechnology sector

  • Cloud Computing: providing almost unlimited computing resources to everyone and avoiding new companies to make large upfront investments in hardware (considerably reducing the cost to launch a new start-up)

  • Machine Learning (AI): providing new insights in large datasets, which are impossible for humans to process (due to the sheer volumes).

Keeping track of all those evolutions is almost an impossible task (unless when focusing on a niche), let alone following the pace with implementing these new technologies.
Almost all large companies and especially traditional financial service companies can clearly not follow this pace. Apart from some smaller new players and some smaller (often marketing stunts) projects in larger financial institutions, the dominant technology used to process financial transactions still dates from the 90’s and even those technologies are not fully exploited. For example, even with the technology introduced 20 years ago, banks worldwide should be able to implement real-time international payments. Instead national payments can have delays of more than 24 hours, while simple international payments can take multiple days and cost a fortune in transaction costs.

While financial service companies complain a lot about the increasing compliance and legal restrictions imposed by governments, these regulations actually form the very barrier for large tech companies not to flood the market.
Setting compliance and legal issues aside, companies like Facebook, Google, Apple and Twitter could easily link a current account to their customer accounts and provide real-time instant international payments. The cost of implementation would not be very big, as most technology is present in their system (like authentication, exchanging messages internationally, guaranteeing delivery of those messages…​). Instead of sending likes or tweets, the message would represent money.
Luckily for the traditional financial service companies, these protested legal restrictions and different local flavors of the same regulations are prohibiting these large Tech companies of taking this step.
Question however is whether these restrictions can continue to form a high enough barrier.
Initiatives like Bitcoin and Ethereum are already bypassing the existing financial systems and even legislations. Governments all over the world are trying to get a grip on this, but due to the decentral nature of these networks they have a very hard time doing so.

In order to protect their market share, financial service companies urgently need to transform. In the beginning of the internet era, financial service companies were at the forefront of innovation, being one of the first industries providing rich internet applications to their customers. Along the years, almost all financial service companies have lost their innovative character to the (Fin)tech sector.

Young, dynamic IT graduates tend not to choose to work for a bank anymore. If financial service companies want to survive, they need to understand that IT is their core business and therefore treat IT as a key focus area and not as a cost centre, which can be optimized via extensive outsourcing. The CEO of BBVA (Francisco Gonzalez) already understood this 5 years ago (in 2015), when he claimed that BBVA is a software company.

In order to make this transformation, banks need to introduce the practices and methodologies already in place for several years at the large tech companies, i.e.

• Organize in small (2-pizza, i.e. 8-10 persons) teams, who can operate independently (freed up from bureaucratic processes). This means that the teams form independent units, independent from large hierarchical structures and several governance boards. These teams should get the freedom to choose their own technology stack and experiment with new technologies.

• Decentralize a part of the budget allocations (largest part still needs to be allocated to strategic large-scale initiatives) to these teams, so they can work out themselves small technological and business improvements, which they seem best fit.

• Work in a real Agile approach, i.e. gradual incremental delivery of features, instead of the waterfall or semi-Agile approaches currently in place, i.e. most bank executives still steer towards projects with an upfront defined timing and scope.

• Introduce DevOps principles, i.e. the above small teams should have the liberty to deliver regularly to production and be responsible for the operation of their deliveries

• Implement a micro-services architecture, allowing easy replacement of parts of a solution and facilitating the independence of the small teams

If incumbent banks can implement only a part of those actions, competition from Fintech neo-banks will be negligible. The existing customer base, extensive expertise in banking and risk management, local and personal touch, full product scope and scale-advantages of most large incumbent banks gives them enormous competitive advantages over neo-banks. Tech can give fun additional features, but for most people trust in the safety of their money is still the most important decision factor of where to deposit their money.