Barbarians at the bank gates

We always overestimate the change that will occur in the next two years but underestimate the change that will occur in the next 10. This statement by Bill Gates rightly describes the disruptive changes happening in the banking industry. Right business strategy that looks at the longer term can help banks fight the challenge posed by the digital disruptors--FinTech and social media companies. My previous three columns explored the nature of digital disruptions and how banks could transform to handle them. This final column describes the business strategy that will help banks leverage their own advantages.

Can’t beat them? Buy them
A big question is how banks perceive a FinTech start-up--as a threat, a partner or an acquisitive target? Acquisition is definitely one of the key strategies for banks to evolve with the disruptions. A few banks have already invested in digital disruptors. If banks are not quick in acquiring or partnering with FinTech companies, they should be fast enough to incubate their own FinTech start-up capabilities. However, growing inorganically is a faster way to become digitally competitive.

BBVA, a Spanish banking giant, paid $64.77 million for a 30 per cent stake in Atom Bank, which is available only through mobile and tablet apps. In fact, BBVA is on an acquisition spree in this domain. It acquired Simple, a US banking start-up in 2014, and Holvu, a Finnish banking services provider for small businesses, in March 2016.

Another leading retail and commercial bank in Spain, Banco Santander, has a fully-owned FinTech venture capital fund, Santander InnoVentures. The fund will deploy $200 million in financial technology start-ups. They want to collaborate and partner with small companies and start-ups in this space.

BNP Paribas announced a partnership with SmartAngels, a direct investing platform for crowd funding deals. Goldman Sachs has bought Honest Dollar, a Texas-based online retirement planning service. This start-up had raised only $3 million in venture funding.

Acquisition is a good way to acquire skills and scale quickly. The banks can partner or acquire smaller companies since incubating on their own can cost them more time and resources. As per Mckinsey, there are nearly 5,000 FinTech companies in the payments domain, which offers ample scope for banking giants.

Run like a deer not lion
Banks need to speed up their product development. They must shorten the cycle with which they innovate and bring new products to market. The benchmark for them should not be the product lifecycle of other banks; they should look at the product development at Google, Facebook, etc. The banks are usually slow on innovation and their internal processes are too rigid. Most of the big banks have diverse stakeholders because of which they are not as agile as the FinTechs.

But agility is a must if they want to survive the competition. A lion runs for food but a deer runs for life. Banks need to be like deer. The survival of FinTechs depends on speed. Since they are always worried about the cash burn and VCs keep pressuring them for profits, going to market with innovative solutions and products is extremely important for them. Banks are concerned more with the risk than cash burn. FinTechs are driven by the intent to survive while banks aim at retaining the market share. It’s time banks realised they must run for life.

Bring in the outsiders
How many data scientists or digital media professionals the banks hire? How many people do they recruit from outside the industry who bring a fresh perspective to their innovation and product development processes? Banks still go for traditional bankers. They need a radical change in the way they scout for talent. Unless they are willing to hire outsiders, they will remain short on innovative ways to fight the competition which is driven by unconventional thinking.

Banks must have strategists at the top who continuously scan the environment for disrupting changes and look for opportunities to transform and evolve with the ever-changing world.

If banks change their strategy, they definitely can give a tough competition to the FinTech start-ups. They have the advantage of large consumer bases and big assets. They don’t face any capital scarcity. All they need to do is to wake up to the challenge or they will find barbarians at the gates sooner than they expect.


(The writer, a finance and strategy professional, works as VP Business Planning at Group level for ICRA. He writes on strategy, technology, investments, disruption and startups. The views expressed in the article are his own and not of the organisation.)