FinTechs are the main competitors of banks. This is no longer an opinion; it's a fact backed by numbers. Their total annual revenue is projected to reach $9.2 trillion by the year 2027. That’s almost a 95% increase in four years! FinTech offers solutions to problems customers have with banks. And so, this trend will continue. Or will it?
To stay competitive in this landscape, banks have to adapt. They need to become flexible and responsive to meet the growing needs of their clients. Recognizing this, banks have started making significant investments in their own fintech ventures. By doing so, they aim to address the challenges the banking industry faces.
In this article, we will showcase the 5 main challenges that retail banks currently face. We will also explain why FnTechs might not outcompete banks in the long run. On the contrary, they might end up being just another asset.
Fintech software: competitor or potential asset?
FinTechs target the most profitable areas in the banking industry. They operate with precision. Their offerings are customer-centered and simple to understand. Thus, they are very appealing to the modern consumer.
Banks are simply too big and, as a result, too rigid to compete on these terms. Fortunately for them, however, they do possess some distinct advantages.
Where banks have the upper hand
- Capital - Retail banks typically have significant financial resources.
- Customers - They have existing customer bases of significant sizes.
- Trust and credibility - An established reputation goes a long way in finance.
- Regulatory expertise - Banks are well-versed in financial regulations and compliance.
- Access to data - They possess a wealth of customer data.
- Partnership opportunities - Banks boast broad business connections.
When used properly, these advantages enable banks to redefine the playing field. In fact, this change is already underway.
The rise of bank-backed FinTechs
Matteo Rizzi, a fintech expert, highlights a big shift within banks. Mainly, banks are launching their own FinTech startups. Moreover, they are partnering with fintech software companies.
Why is this a game-changer? Because, in this way, banks can bypass their corporate structure. Small organizations backed by banks are not only well-funded but also flexible. Furthermore, they can also leverage other advantages from their benefactors.
In the future, this trend might result in banks and other large financial organizations outcompeting FinTechs. How? By gaining flexibility through partnerships. Prominent players will no longer have to be jacks of all trades. Instead, they will specialize in various competitive niches through their business associations.
Top 5 banking challenges solvable with FinTech
In the present, however, banks still face some challenges. Let’s look at these challenges and how banks could address them by partnering with fintech software developers or founding startups.
1. Legacy mobile banking software
Traditional banks often struggle with their outdated mobile apps. Once innovative, they now lag behind in usability and user experience. Moreover, many of them have reached the limits of their upgradability. Thus, they can’t compete with sleek and intuitive apps offered by FinTechs.
Remote access to bank accounts simply doesn’t cut it anymore. Customers expect their banking software to cover all their needs. They need a universal product, something approaching the “everything app” proposed by Elon Musk.
To address this, banks are partnering with mobile FinTech software development companies. This approach offers several advantages:
- Expertise: FinTech development firms possess the necessary know-how to design cutting-edge apps.
- Cost-Efficiency: Developing apps in-house can be costly; partnerships ensure efficient budgeting.
- Time-Saving: Building apps from scratch takes time; partnerships accelerate the development process.
- Synergy: Banks bring financial expertise, while software development companies offer technical proficiency.
Traditional banks can match FinTechs and challenger banks by using these advantages. As a result, the mobile banking sector will speed up its evolution.
2. Demand for personalized offers
Despite the vast amount of customer information they collect, banks often struggle to provide personalized offers. They mostly operate with big data, employing the "one-size-fits-all" approach. This was effective eight years ago but no longer works in 2023.
In today's world, clients expect to be treated as individuals. They require personalized offers to remain engaged. They won’t remain loyal to a bank that doesn’t meet their needs. Recognizing this is essential if banks want to retain their clients.
To meet this demand, banks have to leverage AI-based data analytics and machine learning. These technologies can decode complex customer data to predict customers’ needs. With them, banks will be able to provide custom offers in real time. However, they'll need to develop advanced AI-based FinTech software first.
This smoothly transitions us to the next challenge banks face in today's industry landscape.
3. Adopting AI banking solutions
AI is redefining the finance industry as we speak. Its adoption is accelerating as algorithms become increasingly sophisticated. However, this revolution is mostly led by FinTech startups, with most major players lagging behind. If retail banks want to remain competitive, this needs to change.
Why are large banks struggling with AI adoption? We’ve identified three major reasons:
- Lack of Strategy: Many banks have been slow to formulate a comprehensive approach to integrating AI into their operations.
- Employee Apprehension: Bank employees often fear AI could render their roles redundant.
- Expertise Gap: Banks lack the in-house expertise needed to harness the full potential of AI.
To overcome these hurdles, banks must develop cohesive AI adoption plans. They'll have to educate their employees about AI and its use cases. But most importantly, they will have to implement AI Fintech Solutions.
To do all of this efficiently, banks must consider collaborating with specialists. Remaining competitive is at stake here, so knowledge and experience must be sourced. There's no time to start from square one.
4. The need for user-centered innovation
The landscape of banking technology is ever-evolving. AI-based solutions and modern banking apps are just the tip of the iceberg. The truth is, financial innovation is no longer a choice; it's a necessity. Banks that wish to remain relevant must embrace it.
To be innovative, banks must learn how to listen to their customers. Furthermore, they have to learn how to respond to their needs swiftly. However, customers vary greatly from one another, so this is easier said than done.
The main factor here is their age. There's a considerable gap between the expectations of younger and older generations. Banks capable of innovating in a way that satisfies both are bound to forge ahead.
Separate bank branches tailored for different generations are the most likely solution here. The times of trying to appeal to everyone with one product are over. The new direction is a deluge of tailor-made solutions aimed at different demographics.
5. Combating the increasing costs
The financial burden on retail banks continues to mount. Costs are increasing in nearly every aspect of banking. As a result, the cost of acquiring and retaining customers rises exponentially. When we factor in the ever-increasing competition, the magnitude of this problem becomes quite apparent.
It's no surprise that retail banks strive to reduce costs wherever possible. From layoffs to outsourcing, they employ every trick from the playbook. However, their efforts often fall short. Why? One word: recession.
The only real solution to mounting operating costs is automation through FinTech. By leveraging automated solutions, banks can:
- Reduce manual workloads
- Streamline operating procedures
- Optimize customer experience with AI
- Efficiently ensure compliance with RegTech
To harness fintech's cost management potential, banks should embrace collaboration. Partnering with fintech firms grants access to advanced tech and expertise, reducing the need for in-house development.
The evolving financial industry presents significant challenges for banks. To address these challenges, banks should collaborate with FinTech companies. Such partnerships could streamline operations, enhance customer experiences, and ensure competitiveness. The synergy between traditional banking and FinTech is key to the industry's future success.