Why Banks Will Never Catch Up With Fintechs

Banks are way ahead of Fintechs in terms of revenues, profits and customer numbers. To that extent, the "catch up" in the context of this post refers solely to User Experience of websites, mobile apps and any other kinds of software used by consumers of banks and fintechs (collectively "apps").

Before I dive deeply into the central theme of this post, let me define and distinguish between banks and fintechs.

Bank: A traditional company that has a banking license and offers bank account, fixed deposit, credit card, personal loan, payments and other financial services products. Acquires and owns the customer relationship. Examples: Barclays, Citi, HDFC Bank, JPMorgan Chase, State Bank of India.

Fintech: A new age financial technology startup that lacks a banking license but offers one or more of the aforementioned financial services products directly to consumers by partnering with a traditional bank. (Some fintechs may have a money transfer operator license, which is not a banking license). Acquires and owns the customer relationship. Examples: Lending Club (online P2P lending), PayTM (payments), PhonePe (payments), Chime (bank account), Venmo (payments).

Fincumbent: A traditional IT vendor that supplies core banking system, payments solutions, loan origination software and other financial services technologies to banks but has no financial services products of its own. Examples: - Fiserv, IBM, Infosys, Opus Software (a GTM360 customer), i-flex solutions / Oracle Financial Services Software (my past employer).

NOTE: Fintech should not be confused with Fincumbent. The former is a B2C company, the latter is a B2B company.

First let me share my personal experience with apps from banks and fintechs.

Mobile Banking

I tried the mobile banking app from my bank as soon as it was launched 3-4 years ago. It used the same login screen as its desktop online banking website. I found it too painful to enter a long password having a combination of numerals and special characters and letters in uppercase and lowercase (e.g. Pa$sw0rd!23) on the virtual keyboard of a smartphone. I deleted the app immediately. I recently heard that the password has been replaced with a convenient PIN number. But I haven't bothered to reinstall the mobile app - the bank's branch and NetBanking channels are more than enough to fulfill my modest banking needs.

Mobile Payment

I tried the mobile payment app from my bank (herewith “BankPe”). It had a decent UX when I onboarded it 2-3 years ago. The UX has improved a lot since then. BankPe is my go-to app for bill payments.

Stock Trading

I've been using the stock trading website from my e-brokerage (a bank) for nearly 20 years. I tried its mobile stock trading app at least twice over a period of 2-3 years. Both times, I deleted it, because of login friction.

Let me compare that with my personal experience with fintech apps.

BankPe is not as frictionless as PayTM, the largest nonbank fintech in India. However, it's way better than Google Pay, MobiKwik, PhonePe and many other mobile payment apps.

I've never tried any neobank or fintech stock trading app.

(https://twitter.com/s_ketharaman/status/1051857914007306240)

Based on the above, I'm not that sold that banks are too far behind fintechs on User Experience.

But my conclusion is based only on two datapoints.

There are so many more bank and fintech apps.

People who have tried them might think differently from me and believe that banks have a lot of catching up to do with fintechs.

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In my opinion, that "catching up" will never happen. There's a "glass ceiling" for bank apps compared to fintech apps because of the following fundamental differences between banks and fintechs.

#1. UX MINDSET

Banks launched digital financial services apps like NetBanking and Mobile Banking to reduce operational costs of branch banking aka improve profits. Their orientation towards user experience came about later. (I can hear some of you saying some banks still don't have customer orientation - I won't disagree with them.) As a result, barring a few banks, UX will always be an afterthought for banks. Unlike fintechs whose raison d'être to disrupt banks is based on superior UX.

#2. ATTITUDE TOWARDS REGULATION

BankPe logs me out automatically after a few moments of inactivity. So I need to enter a password everytime I want to pay with BankPe. But I can make a PayTM payment without entering a password each time because PayTM keeps me logged in forever. Since it’s a PITA to enter a password like Pa$sw0rd!23 into a virtual keyboard, I rate PayTM’s UX superior to BankPe’s UX.

BankPe complies with the regulator's mandate that every payment must require a password but, in the process, takes a beating on UX. Whereas I suspect that PayTM does not, and thereby gains points on UX.

(https://twitter.com/s_ketharaman/status/965564220552171521)

As a regulated entity, a bank can’t get away by breaking a regulator's mandate. This poses a limit on the extent to which a bank can improve the UX of its apps if the improvement calls for bending of rules.

#3. TOLERANCE TO OUTAGE

As banks are regulated entities and custodians of public money, they have a lot more at stake if something goes wrong with their apps. Nonbank fintechs are not regulated and can take more risks.

If a bank does a software update and, God forbid, one of its apps stop working, there will be a huge outcry among the public. The regulator will slap a huge fine on the bank (e.g. Royal Bank of Scotland fined £56m for IT meltdown) and, in extreme cases, even force out the bank's leadership (e.g. TSB Bank CEO Paul Pester resigns as IT problems persist).

I doubt if anything like that will happen if a fintech did a software update and its app stopped working. In fact, some fintech founders may even brag about the outage and claim it's a proof of the "move fast and break everything" creed of startups.

As a result, banking apps tend to undergo rigorous testing, which elongates release cycles. Banks will inevitably take more time to make a given UX enhancement than fintechs. You can find an excruciating example of that tendency in the following exhibit.

#4. CAPACITY FOR MAKING LOSSES

Fintechs are under no pressure to post profits. This gives them the ability to pay outsized salaries to their employees - including UX designers - since they don't have to lose sleep over high employee costs (among other costs!). As long as they're able to attract venture capital to fund their whopping losses, fintechs can splurge on high caliber designers at hefty pay packages and pamper them with beanbags, sleeping pods, and ESOPs.

Banks can't do that. Their revenues and profits are under constant scrutiny. Alarm bells will ring if banks post less than their customarily high profits. All hell will break loose if they make losses.

FINANCIALS is #1 sector in latest FORTUNE 500 by Revenues, Profits & # of Companies.

All this crimps banks' ability to attract high caliber designers.

#5. LEGACY?

In the West, banks began their computerization journey on mainframes 50-60 years ago. Over time, they embraced open systems and digital technologies. As a result, the typical IT landscape of most banks in the West is dotted with legacy and modern applications. A typical customer journey straddles both eras of applications. It's not easy to make them work together that seamlessly. Many pundits hold that integration challenges take a toll on the UX of banking apps compared to fintech apps, which are built from the ground-up entirely on digital technologies.

I'm not too sold on this narrative because banks in emerging markets like India began computerization more recently and don't have any legacy applications, but still lag fintechs on UX. Nevertheless I thought of bringing up this point in case I've missed something.

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From personal experience and anecdotal evidence, bank apps have inferior UX compared to fintech apps.

That said, bank apps are vastly superior to apps from most other industries.

• For nearly 25 years, I've been using IBM / Lenovo ThinkPad laptops. Not once have I been able to order them from IBM / Lenovo's website, which suck bigtime.
• Every time I use my TELCOs' websites or apps, I thank the almighty that it worked. The "thanksgiving" happens only half the time. Let me take the example of my broadband provider. Whenever I bust its daily data quota, I receive an email and SMS from the TELCO with a link to topup my plan in order to continue enjoying high speed. It's always a guessing game what happens when I click the link: Sometimes, I'm taken to a landing page with my number prefilled and I can complete the topup in a couple of clicks; at other times, I reach the homepage where I need to enter the number; and some other times, nothing happens.
• Then there are a number of industries that don’t even have apps whose UX can be compared with that of banking apps. When Internet came, they said it would kill the Middleman. But, ironically, more than 20 years later, I still buy a Dove soap from the World's Largest Middleman aka Amazon because it's not available for sale on the website of its manufacturer, Unilever. Ditto dozens of other consumer goods like Colgate toothpaste, Gillette razor blades, and Listerine mouth wash. Feel free to enlighten me but I don't know a single FMCG company that lets me order its products on its website / mobile app.

(https://twitter.com/s_ketharaman/status/1121788572925751296)

But coming back to fintechs, the glass ceiling faced by banks won't go away anytime soon.

Therefore, for the forseeable future, banks will always lag fintechs on the User Experience of their apps.