Published by Gbaf News
Posted on December 6, 2017
Eugene Danilkis, CEO & Co-Founder of Mambu
Digital technology has changed financial services. It has facilitated innovation, increased competition and made the mobile customer experience the key differentiator.
While this is good for customers, for established institutions it has brought the realisation that spending years and millions building an ecosystem expecting the technology, customer experience and product mix to last for the next decade no longer works. Together with the growing number of FinTechs entering the sector, more pressure is being placed on established banks and lenders to keep up.
The Strategic Threat
The new entrants are backed by venture capital, enabled by regulators and fuelled by recognition from the media and industry influencers. They are gaining traction in the opportunity rich digital banking and lending space and while their market share may be small, all the established institutions we engage with recognise the significant strategic threat they pose.
They possess the characteristics which are increasingly important to consumers and shareholders alike. They are lean, agile, provide a best-in-class customer experience and are able to grow and scale rapidly.
This embodies a strategic threat with McKinsey estimating that legacy financial institutions will see profits decline by up to 60% by 2025 if they fail to evolve, a figure which should be motivating incumbents to look outside of traditional practices for growth and sustainability.
Operating Like A FinTech
Not all of these new entrants are startups, although given their operating models one would think otherwise. Large tech companies like Amazon, Apple and PayPal together with telcos like Globe Telecom in the Philippines and Safaricom in Kenya are starting their own banking and lending businesses, leveraging their resources and existing customer bases to expand into new markets and launch new products.
Many of these companies have one distinctive characteristic in common: they are operating like FinTechs, working independently of their parent organisation, adopting a new culture, and using the latest technology to provide a best in class customer experience.
Growth Opportunities
While banks can continue to rely on the upper end of the market to provide steady revenue streams, long term growth lies in geographic expansion, improving customer experience and focussing on underserved markets and SMEs.
Millennials and digital natives have turned away from traditional banks in search of mobile alternatives. They are drawn to the best products and experience, and banks with the right level of service can win over this large market. Mobile-only banks like N26 are leading the way. Their strategy is simple, offer customers the best digitised products on one platform.
It has helped them grow their customer base 500% in a year reaching 500 000 customers in mid-2017. What’s most impressive about their growth is it is primarily based on referrals from existing customers, underlining the importance of a positive experience .
SME lending also offers a significant opportunity for growth. The European Commission’s SME Performance Review estimated just under 23 million small and medium enterprises generated €3.9 trillion in value add and employed 90 million people in 2016-2016, and McKinsey has identified a $350 billion untapped lending opportunity within this sector. This growth sector has seen numerous new entrants who are using digital technology to navigate a complex lending environment.
If banks and lenders are willing to change their thinking and take a digital approach now, they can benefit from the same opportunities as they have a distinct advantage, the ability to leverage their balance sheet to help them navigate a rapidly evolving market.
Launching Speedboats
One path is acquisition, which banks like BBVA have followed by acquiring companies like Finland’s Holvi and neobank Simple. This is an expensive option complicated by having to find a company with the right fit for the business. There are also only few acquisitions to go around, and making old and new cultures and processes work, while retaining the top talent of the FinTech after their big payday has always been a challenge in acquisitions.
Given the technology available, a cleaner option would be to build a digital banking spinoff which can operate like a FinTech. If we look at established banks as cruise ships: large, expensive to operate, process heavy and slow to manoeuver, the spinoff can be seen as a speedboat: independent, cost-effective, agile and lean. It can be launched within twelve months, unrestricted by geography and able to penetrate new markets.
A spinoff has to be seen as an investment in an innovation arm, created to address a specific market need and unimpeded by traditional organisational processes. Given the freedom, it could leap ahead technologically by prioritising APIs, automation, cloud and mobile first thinking and be able to demonstrate results and customer impact in a short period of time.
Banks can derive value by leveraging technology to streamline operations, automate processes and significantly reduce overall cost of doing business. By accessing the very technology used by the new players allows them more focus externally on clients and service instead of internal systems and processes.
New People, Thinking and Processes
Technology, while a differentiator, is just one cog in the machine. Real transformation is only possible with a change of people, thinking, and processes.
This means new leadership incentivised to drive success of the spinoff and not conflicted between the bigger organisation and the new venture. This leadership has to instill a culture of innovation and continuous change from the start to enable it to act like a startup without being held back by legacy processes.
First Mover Advantage
This speedboat approach is already gathering speed with established institutions seeing the first mover advantage and launching spinoffs to grow outside of traditional structures.
We have been working with a tier 1 European bank that will be launching a digital spinoff this year. They saw the opportunity in the SME market and chose to take a digital approach to reach this underserved sector. The digital bank will operate like a FinTech and is using agile and lean technology that allows them to go to market quickly, tailor their products to specific market and regulatory needs, and scale operations.
They began with a small project team of less than 10 people and with the leeway to innovate, they have built a new business which launches publicly in September 2017, less than 12 months from project kickoff and after six months of limited-release piloting.
Learn from the market
Banks and lenders cannot keep moving in the same direction if they want to see themselves as relevant and innovative. They need a long term strategic approach not a tactical fix. Through digital spinoffs, they can allow themselves the flexibility to play at speeds at which startups operate.
Those currently on cruise ships have the opportunity to launch a speedboat or two. The key is to learn from what works best in the market and build on that, eliminate aspects that did not go as smoothly, then change tact and direction. This is what innovation is about: the ability to explore and quickly iterate on what works in the market, and in the process, redesign banking for the 21st century.
Eugene Danilkis, CEO & Co-Founder of Mambu
Digital technology has changed financial services. It has facilitated innovation, increased competition and made the mobile customer experience the key differentiator.
While this is good for customers, for established institutions it has brought the realisation that spending years and millions building an ecosystem expecting the technology, customer experience and product mix to last for the next decade no longer works. Together with the growing number of FinTechs entering the sector, more pressure is being placed on established banks and lenders to keep up.
The Strategic Threat
The new entrants are backed by venture capital, enabled by regulators and fuelled by recognition from the media and industry influencers. They are gaining traction in the opportunity rich digital banking and lending space and while their market share may be small, all the established institutions we engage with recognise the significant strategic threat they pose.
They possess the characteristics which are increasingly important to consumers and shareholders alike. They are lean, agile, provide a best-in-class customer experience and are able to grow and scale rapidly.
This embodies a strategic threat with McKinsey estimating that legacy financial institutions will see profits decline by up to 60% by 2025 if they fail to evolve, a figure which should be motivating incumbents to look outside of traditional practices for growth and sustainability.
Operating Like A FinTech
Not all of these new entrants are startups, although given their operating models one would think otherwise. Large tech companies like Amazon, Apple and PayPal together with telcos like Globe Telecom in the Philippines and Safaricom in Kenya are starting their own banking and lending businesses, leveraging their resources and existing customer bases to expand into new markets and launch new products.
Many of these companies have one distinctive characteristic in common: they are operating like FinTechs, working independently of their parent organisation, adopting a new culture, and using the latest technology to provide a best in class customer experience.
Growth Opportunities
While banks can continue to rely on the upper end of the market to provide steady revenue streams, long term growth lies in geographic expansion, improving customer experience and focussing on underserved markets and SMEs.
Millennials and digital natives have turned away from traditional banks in search of mobile alternatives. They are drawn to the best products and experience, and banks with the right level of service can win over this large market. Mobile-only banks like N26 are leading the way. Their strategy is simple, offer customers the best digitised products on one platform.
It has helped them grow their customer base 500% in a year reaching 500 000 customers in mid-2017. What’s most impressive about their growth is it is primarily based on referrals from existing customers, underlining the importance of a positive experience .
SME lending also offers a significant opportunity for growth. The European Commission’s SME Performance Review estimated just under 23 million small and medium enterprises generated €3.9 trillion in value add and employed 90 million people in 2016-2016, and McKinsey has identified a $350 billion untapped lending opportunity within this sector. This growth sector has seen numerous new entrants who are using digital technology to navigate a complex lending environment.
If banks and lenders are willing to change their thinking and take a digital approach now, they can benefit from the same opportunities as they have a distinct advantage, the ability to leverage their balance sheet to help them navigate a rapidly evolving market.
Launching Speedboats
One path is acquisition, which banks like BBVA have followed by acquiring companies like Finland’s Holvi and neobank Simple. This is an expensive option complicated by having to find a company with the right fit for the business. There are also only few acquisitions to go around, and making old and new cultures and processes work, while retaining the top talent of the FinTech after their big payday has always been a challenge in acquisitions.
Given the technology available, a cleaner option would be to build a digital banking spinoff which can operate like a FinTech. If we look at established banks as cruise ships: large, expensive to operate, process heavy and slow to manoeuver, the spinoff can be seen as a speedboat: independent, cost-effective, agile and lean. It can be launched within twelve months, unrestricted by geography and able to penetrate new markets.
A spinoff has to be seen as an investment in an innovation arm, created to address a specific market need and unimpeded by traditional organisational processes. Given the freedom, it could leap ahead technologically by prioritising APIs, automation, cloud and mobile first thinking and be able to demonstrate results and customer impact in a short period of time.
Banks can derive value by leveraging technology to streamline operations, automate processes and significantly reduce overall cost of doing business. By accessing the very technology used by the new players allows them more focus externally on clients and service instead of internal systems and processes.
New People, Thinking and Processes
Technology, while a differentiator, is just one cog in the machine. Real transformation is only possible with a change of people, thinking, and processes.
This means new leadership incentivised to drive success of the spinoff and not conflicted between the bigger organisation and the new venture. This leadership has to instill a culture of innovation and continuous change from the start to enable it to act like a startup without being held back by legacy processes.
First Mover Advantage
This speedboat approach is already gathering speed with established institutions seeing the first mover advantage and launching spinoffs to grow outside of traditional structures.
We have been working with a tier 1 European bank that will be launching a digital spinoff this year. They saw the opportunity in the SME market and chose to take a digital approach to reach this underserved sector. The digital bank will operate like a FinTech and is using agile and lean technology that allows them to go to market quickly, tailor their products to specific market and regulatory needs, and scale operations.
They began with a small project team of less than 10 people and with the leeway to innovate, they have built a new business which launches publicly in September 2017, less than 12 months from project kickoff and after six months of limited-release piloting.
Learn from the market
Banks and lenders cannot keep moving in the same direction if they want to see themselves as relevant and innovative. They need a long term strategic approach not a tactical fix. Through digital spinoffs, they can allow themselves the flexibility to play at speeds at which startups operate.
Those currently on cruise ships have the opportunity to launch a speedboat or two. The key is to learn from what works best in the market and build on that, eliminate aspects that did not go as smoothly, then change tact and direction. This is what innovation is about: the ability to explore and quickly iterate on what works in the market, and in the process, redesign banking for the 21st century.
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