As fintech matures, it becomes more sophisticated and moves toward the core of banking. Now we begin to ask, will innovation remain incremental, as in the types of innovations we see with the advent of Open Banking? Or will we see a monumental shift in bank capabilities? Are the platforms now being built that will topple banking as we know it?
This was one of the many questions debated at our Fintech CEO Roundtables in Berlin and Frankfurt.
When spreadsheets ruled the day
There was a time when it was easy to be a highly-valued venture-backed fintech — not just here in Germany, but all over the world. All one needed was a slick UX/UI. One could hold “the magic” together behind the scenes using manual processes. Never mind databases, Excel spreadsheets ruled the day. In other words, there was no back-end innovation. In fact, I’m familiar with companies that had no back-end at all. To say that these companies were held together by duct tape and bubblegum wouldn’t be far from the truth. That was then.
This is now
One side of the argument states that major change is only possible when one rewrites (and controls) the core. So who is rewriting the core? Certainly not Deutsche Bank or Commerzbank, nor Wells Fargo nor Bank of America. But Goldman Sachs is, and so are N26 and Raisin. Boe Hartman of Marcus by Goldman Sachs recently stated that they run on about 65% third-party (SaaS) services and 35% custom code. This seems like approximately the right ratio to me; 100% custom code would be mean maintaining a loathsome cost base, while 100% SaaS reliance would mean virtually no differentiation. Marcus is shipping code in two-week sprints. That’s not banking, that’s agile. And it’s about time we saw some of that in core financial services.
The AMZN-ization of finance is upon us
I see this as the Amazon-ization of of finance, where owning the platform changes everything. It’s no secret that Bezos’ recipe for success is to own the platform on which everything is built, and thereby own the industry. Just look at the impact that AWS has on the entire IT industry. (In fact, a litmus-test question for fintech-banking partnerships is whether or not the bank runs any portion of its bank on AWS, IBM Cloud, Google Cloud, or Azure. Anything will do, as long as it’s in the Cloud.) The platform changes everything. In banking services, the truly novel innovators are building their services from the ground up. Again, see the bank challengers as examples.
Customer expectations are changing
Banks at one time may have hidden behind the idea that they have humans (tellers) that people can — and in fact wanted to — interact with, and that bank customers need a personal interaction in order to enjoy a proper banking experience. I’m not sure banks still believe in that hogwash, but to the degree that they do is the speed with which they will vanish from the face of the earth. Sure, boutique experiences are still desired in some cases. Let’s say that’s 5% of the use-cases out there. For the vast majority of bank experiences, we want an Amazon-ized experience.
What will become of the banks?
I return to the question: Will the banks survive? Here I’m speaking of the 5000 small- and mid-size banks that currently operate in the US, or the 1000 similarly-situated banks that serve the German mittelstand. I will argue this: if their core model does not change, a large number of banks stand to be demolished by the Amazonization of finance.
It’s the little things that count
The quote of the day goes to a fintech leader who said, “the big things are the small things.” If you can’t afford to innovate and iterate on the small-but-meaningful details of customer experience, you will not survive the onslaught brought on by sophisticated challenger banks.