Athletes work on their sports knowledge and skills every day, for weeks, months, and years as they hone their craft. Their strategy is to develop such strong muscle memory that when they are in competition, their body executes flawlessly. They become students of the game. So what does this have to do with banking? Everything.
In today’s environment, as banks manage increased regulation and competition from industry outsiders, they must operate in the same fashion. Banks have to put themselves in competition-type scenarios so they can deliver a superior performance when it counts.
To do this they must invest in knowledge and skill development. Keeping a bank in top shape means fostering innovation. Banks need to decide if they can be nimble enough to compete on their own or if they should develop technology partnerships. Just like an athlete deciding to bring in a trainer to achieve the results unable to be reached on his or her own. There are several ways for banks to elevate their game—fintech houses, neobanks, alternative lenders, in-bank labs.
There are now more than 8,000 financial technology companies in the United States with the potential to shake up traditional financial institutions. Americans expect trust, transparency, and accessibility in their banking services and fintech houses are serving customers in that way.
Fintech does have the ability to deplete the banking industries’ profitability as few consumers who use fintech services ever return to their traditional banks. To hold customers and stay competitive various large banks are choosing to invest in fintech startups to integrate their talent, ideas, and technologies.
Neobanks are gaining traction with millennials and the underbanked by connecting to their customers in a way that most banks do not—through the experience. They are not trying to fulfill all of their customers’ financial needs, rather providing an alternative to the traditional brick-and-mortar bank through features like mobile deposits and P2P payments. Neobanks are turning users into fans by being nimble, but their very existence often depends on partnering with traditional banks.
Smaller community banks are finding it beneficial to collaborate with neobanks. Not only are these banks expanding their base services but they are pulling in an innovative trainer versed in the latest technology advancements.
Alternative lending platforms are providing capital to consumers more efficiently than traditional banks. There are hundreds of startups that are leveraging data to approve loans faster and for amounts that banks usually decline to finance. They specialize in utilizing overlooked sources of collateral and are typically more flexible than banks when it comes to repayment schedules.
Alternative lenders collect data from different sources than traditional banks (such as social media interactions) and continuously update their risk management knowledge base with new sources of data. These companies should not be perceived as competition, but as a team to collaborate with to economically diversify business and gain more customers. Their model builds businesses up that will then come to banks for future loans, not to mention deposits.
Numerous banks are creating innovation labs with walls turned into whiteboards from floor to ceiling and comfy nooks to allow for staff to collaborate. Is this really necessary? No. Physical space is important but can be a distraction. An employee doesn’t need to be able to ride a Segway to address innovation. The focus needs to be on fostering new innovations, moving faster than startups, and turning a profit.
In-bank labs need to rapidly cycle test and learn within the walls of the bank, build platforms, and spin out successful platforms into new offerings that can be shared with other institutions. The fail fast concept applies here—differentiation is created through continuous improvement.
With banks rooted in stability and time-tested consistency, it can be difficult to embrace innovation. This balancing act is why many banks path to innovation is through acquisition. No matter the path, keeping the bank in the winning zone means incorporating innovation into their athletic regime. Athletes invest time in their knowledge and skills outside of competition to ensure they deliver when the game counts. Banks must do the same to stay relevant in a rapidly changing industry.