Neo banking has revolutionized banking. These digital-first entities have garnered the spotlight, wowing customers with their nimble approach, rapid feature development, and digital prowess. Their success hinges on the ability to be agile and responsive, qualities that traditional banks often struggle with because of legacy tech and soloed data structures. Cloud transformation now can shape the future of the banking ecosystem to empower innovation and scale rapidly.
Aberdeen Group research suggests that companies adopting customer journey-focused strategies could witness a 10X year-over-year increase in annual revenue. Forrester’s research also lends support to this claim, noting that customer experience leaders could potentially outstrip their competitors in revenue growth by nearly six times.
Potential challenges of legacy banking systems
Traditional banks are often burdened with legacy technology that forms a barrier to innovation. Siloed data restricts banks from promptly responding to customer feedback and the ever-evolving needs of the market. For instance, the National Australia Bank (NAB) reportedly took weeks to deploy workloads on its forex platform before moving this capability to Amazon Web Services (AWS), as highlighted in a case study by AWS.
In contrast, fintech startups enjoy a distinct advantage due to their unique risk appetite, innovative funding models, and quick-to-market strategies. However, their long-term profitability and sustainability are still under scrutiny. This dynamic approach enables fintech startups to gain edge over traditional banks in the following ways:
Unconventional growth strategy: Begin small, scale quickly
A prominent characteristic of the world’s fastest-growing unicorns, neo banks, is their approach to growth – they begin small but scale quickly. Traditional banking processes, which would often take years to introduce new products or services, are now being rapidly outpaced by these digitally native banks. Today, neo banks are launching and expanding their offerings within a span of 2-4 years, thereby revolutionizing the pace of the banking sector.
Technology infrastructure: Building a digital-ready platform
The digital revolution has necessitated a shift in how business infrastructures are designed and implemented. Most startups are leading the charge by building digital-ready, cloud-based platforms. These platforms are not only designed to scale quickly but also provide customers with the ability to open accounts within minutes and transfer money in seconds. Such agility and user-centric design have become integral to staying competitive in today’s digitally driven banking environment.
Digital natives: The cost advantage
Fintech companies, as digital natives, possess a unique advantage over traditional banks. By virtue of their digital-only approach, these entities save significant costs compared to their traditional counterparts. These savings are not limited to operational costs but extend to the ability to rapidly test, launch, and modify products or services as per market needs and customer feedback.
Quick testing philosophy: Embracing agile methodologies
A distinct philosophy driving the success of most lean startups is their approach to testing – they “fake it before they make it” and “move fast to break things”.
While such an approach might seem risky, it actually underscores their focus on speed, innovation, and learning from failures. However, this proposition doesn’t automatically translate into business functionality, particularly in heavily regulated markets like financial services.
To navigate this challenge, startups rely on their lean and agile digital infrastructure. This flexible setup allows for quick testing and seamless feedback integration, fostering an environment of continuous improvement and innovation.
By channeling customer data back into the system, startups can derive actionable insights that enable them to provide better-informed, personalized financial decisions for their customers. In this way, the quick testing philosophy is more than just a mantra; it’s a strategic enabler of sustained competitive advantage.
Legacy tech: The bottleneck for traditional banks
Traditional banks’ reliance on legacy technology acts as a barrier to leveraging agile methodologies. It hinders access to vast customer data pools, which could be harnessed for insightful analytics to enhance customer experiences. Notably, legacy tech can consume up to 80% of a bank’s IT budget, while creating multiple layers of data duplication.
Furthermore, traditional banks often struggle with leveraging data analytics that could significantly improve customer decisions and experiences. Data transfer is often manual, time-consuming, and inefficient. This is especially troublesome in an era when customer demand for instant, real-time, personalized products and services is the new normal.
Security concerns regarding sensitive customer data are another hindrance to embracing cloud technologies. Despite major cloud platforms such as Google or Microsoft boasting top-notch security expertise and federal data governance standard compliance, cultural factors often stand in the way of full adoption.
In response to these challenges, many larger banks are leaning towards launching fintech propositions from scratch, rather than building on outdated technology. This trend is particularly evident in Asian countries where banks aren’t as encumbered by legacy technology.
Cloud transformation: The gateway to modern banking
As the traditional banking sector navigates the digital revolution, cloud technology is emerging as a critical tool for transformation. Banks now have an opportunity to leapfrog into this new era without having to build modern, digital-first propositions from scratch. Leveraging cloud-based platforms, traditional banks can mirror the agility of fintech startups and navigate past the barriers posed by legacy technology.
However, the journey to cloud adoption doesn’t just involve technological adjustments; it also necessitates adapting to evolving cybersecurity and regulatory landscapes. As data migration to the cloud becomes increasingly commonplace, data security and regulatory compliance take center stage. Cloud platforms need to maintain meticulous data audits and meet stringent security standards to safeguard banking data.
Once successfully on the cloud, banks gain remarkable agility in managing customer data. Paired with open-source technology, this agility can result in better understanding of customers, meaningful data-driven insights, and more effective financial products. With their vast data repositories, traditional banks can offer enhanced advisory services to corporate clients, a competitive edge often missing in fintech startups.
Overcoming structural and cultural hurdles for cloud transformation
Despite the advantages of the digital transition, traditional banks face intrinsic challenges that need to be overcome:
- Hierarchy: Traditional banks tend to have large hierarchies and rigid processes which slow down decision-making and prolong time-to-market. In contrast, fintech startups often thrive in flat, agile environments where decisions are made rapidly and products are rolled out swiftly.
- Culture: The cultural DNA of traditional banks prioritizes safety, steadiness, and caution, a stark contrast to the risk-embracing, consumer-centric, and innovative ethos of fintech startups. To remain competitive, traditional banks need to foster a culture that encourages innovation, rapid testing, and agile response to failures.
- Regulations: The heavily regulated nature of the banking industry can limit a bank’s ability to exploit new technologies. In contrast, fintech startups often face fewer regulatory constraints, enabling them to grow rapidly and focus on enhancing customer experiences.
- Funding: While traditional banks typically have ample funds, fintech startups often operate without a strict bottom line, thanks to risk-tolerant venture capitalists eager to back potential unicorns.
Leveraging the incumbent advantage
Despite these challenges, traditional banks still possess strong advantages. Their regulatory compliance, large customer base, vast data pools, and economies of scale are unparalleled assets. Traditional banks’ ability to offer a one-stop-shop for retail, corporate, and investment banking gives them a competitive edge.
Yet, these resources need to be deployed more agilely to compete with fintech startups. Traditional banks should prioritize enriching customer experiences and delivering responsive products, fields where fintech startups often shine.
Future of banking: Fintech startups or traditional banks?
As we look ahead, it’s difficult to predict whether fintech startups or traditional banks will gain the upper hand. They each possess their unique strengths and face distinct challenges. Banks enjoy hefty funding and a stringent regulatory framework, while fintech startups thrive on flexibility and risk-taking.
To secure a competitive edge, both traditional banks and fintech startups need to harness the potential of cloud technology for speed and agility. However, technology is not the sole panacea for traditional banks.
To truly achieve agility, banks need a cultural shift, an increased appetite for risk, and a willingness to emulate their fintech competitors. The future of banking is poised to be a dynamic interplay of technology, culture, and competition.
