Banks have, in large part over the past few decades, continued to stay the same. Although there have been minor operational changes, there has not been a need to materially change. This slow and steady strategy worked, and banks continued to grow as the
customer base demographics did not force fundamental changes to the business model.
The banking business in current times is a commodity business. Thousands of banks, credit unions, and financial services organisations in the United States offer the same product. Today, when you ask a bank executive how they compete, you’ll hear that “service”
is the top reason why his or her bank is successful. This won’t work in the future. There is significant misalignment between what the banks are offering and what the future customer wants. We see it in industries that we support and work with, but the massive
changes have not hit the banking sector yet.
The potential for shifts can be seen, but change has been slow. Whether it is due to the regulatory moat that banks are surrounded by, legacy executive management refusing to change, or because fintech partners have not found a truly beneficial way to financially
contribute, banks have not adapted to the future as much as other industries have been forced to do. Change has been incremental, but that will no longer be the case. Banking will experience its Uber/Taxi moment in the next five to ten years. The business
model will change and the landscape will be forever altered. What worked for decades will become obsolete. Bank management teams and CEOs who have not taken action today will be left behind.
The main reason this will happen is due to the generational wealth transfer. We are in the middle of it today. In the future, the decision makers who own businesses, deposits, and who borrow money from banks will change from the people who are in those positions
today. Relationships cultivated for decades between relationship managers and current customers will not be relevant to retaining the business and to future growth. The new customer, a descendent or next generation owner, does not want to be banked the same
way their mom and dad was banked over the past decades. This new customer prioritises speed, convenience, and is looking for a different relationship with the banks. Just look at the way we buy products and services today. From commodity goods, food delivery,
transportation, to home buying and entertainment, our societies have changed the way we all live our lives.
A few banks have been proactively trying to lead the industry in solving this problem. Most have stuck their heads into the ground. The reality is that the entire landscape will change; there will be winners and there will be losers. Not all incumbents will
survive.
Large banks will have the resources to participate in the future if they can make the right decisions, but what about the community banks? What will happen to them? If nothing changes, they will continue to experience the acceleration of the consolidation
which cut the total number of banks in the US in half. The only way to survive is to evolve and grow. Regulatory, employee, and compliance costs continue to rise and business continues to be harder to obtain using techniques that are the same at all competitors.
Without adapting to the changing environment, the future for individual banks is bleak.
The banks who will survive and thrive are the ones who can find a way by focusing on the strengths of a smaller company with limited resources. Being nimble, acting faster, leading the way and banking specialised niches with unique products and services
can all lead to successful outcomes.
Bank executives need to look in the mirror and be honest with themselves. What are they good at and what are they not good at? For the things that are not well understood internally, banks must look outside for solutions and ideas. Leaders must partner
with organisations who have the knowledge and skillsets that they don’t have.
Options are endless and many do not know where to start. Over the past few years, competitor banks have invested time, energy, and resources without much to show. How does a bank vet potential partners and opportunities? How does one know if changes will
actually benefit the bank? The reality is that no one ever really knows. However, inaction guarantees no change of outcome. Effort will create chances to improve.
Just like new business development activities for acquiring new bank customers, banks need to get out there. Meeting innovators and tech entrepreneurs is a good first step. Expanding the bank’s network with sources who can help the bank evolve is necessary.
Go to industry events and conferences. Events like FinXTech, Fintech Meetup, and Money 20/20 can all be good places to start. Ask existing partners like investment bankers and core providers for suggestions. Contact bank leaders who are achieving the results
that are desired.
Once a working group of potential partners is established, vetting becomes vital. All banks have something that fintech companies want and need. Use this to your advantage. Your bank charter is key in helping create the valuation that all fintech partners
are looking for. Make sure agreements and contracts are mutually beneficial. Perform vendor due diligence and ensure that what the bank wants is actually executable and achievable. If the bank has not had success performing these types of activities, find
another path.
One way to do that is to align and start working with partners who can act as a filter for the noise and become a trusted source. Strategic venture funds like BankTech Ventures and Jam Fintop can act as centers of influence who can help the bank focus on
the solutions that are most relevant to the future. The people that work for these organisations are all hyper-connected and focused on bridging this gap for banks. If they don’t know the solutions to your problem, they will do their best to get you to the
right place.
Take time to make sure the bank has the right internal team working on these types of initiatives. If the wrong employees are leading the charge, then the bank cannot expect positive results. Redeploy internal headcount and target external professionals
and hire them to join the cause.
The moment is coming for banking when big seismic changes are needed to survive. Use the success the bank has built over the last few decades to invest in the future. If the bank executes correctly, the opportunities are endless. Create leverage, specialisation
and take advantage of the coming opportunity to differentiate from the rest of the industry.
A bank can do nothing, or a bank can lead and win. The right way to look at this pending disruption is to see it as a giant opportunity. You might as well, because it is coming whether you like it or not.