Disruption is something you can bank on

Over the next three years, the UK-based fintech scene is expected to grow by 88 per cent, pushing the amount of disruption to the traditional banking system to an all-time high. Offering smarter services to time-poor, savvy and always-on customers, the fintech startups – with their speed and agility – are putting more and more pressure on the legacy banks who are increasingly at risk from falling behind, weighed down by their sluggish processes and bound by red-tape.

That’s not to say innovation isn’t happening inside the big banks – there is important work being done to create solutions: the concern is that, while they offer a short-term fix, these innovations are not being delivered quick enough to solve the ever-evolving problems of tomorrow’s customers. Could the long-term solution lie in collaboration?

Dan Archer, Marketing Director of digital experience studio 383 explores how legacy banks can improve their disruptive game, at-scale, and considers how a collaborative approach between legacy banks and fintech startups could yield positive results for all.

The challenge for established banks in delivering meaningful innovation is of their own creation.

As organisations grow, so does the red tape. These are often, point in time self-created rules and regulations that become the organisational accepted norms, they become ingrained and cultural. They may have had a purpose years ago but often don’t get revisited or revalidated in the context of today.

This leads to restrictions and constraints where innovation is suffocated. New ideas can’t flourish and if they do, the ideas generated often fall back into Business As Usual (BAU) delivery processes, slowing the momentum.

Dan Archer

These cultural restrictions are very much linked to size and time. Because size and time are a critical factor, these types of restrictions do not yet exist within startups, allowing them a greater level of freedom and agility to deliver disruptive innovations.

Historically, established banks seemed almost un-disruptable. Customer churn rates were very low and they existed within a highly regulated industry, which required enormous investment, so presented a significant barrier to new market entrants.

The reality is that at this time processes were slow, technology was poor and customers had no real alternatives. On top of which moving banking provider was difficult. In 2016 the Competition and Markets Authority’s (CMA) investigation into the banking industry found that only 3% of current account customers had moved their account in the previous year.

But digital technology has changed that, providing a catalyst for new entrants in the market to rethink banking and provide better products and services.

Since its launch in 2015, UK startup bank Monzo has grown from 0 to over 750k current account customers. While this is only circa 1% of the total UK current account market, there are hundreds of Monzos out there, gaining momentum and market share. 

So how are startups doing this and is it too late for the big banks of old?

Recently, disruption and technology have become intertwined. But let’s be clear, disruption and new technology are separate things. Technology is a means through which disruption can be delivered, but it’s not what disruption is.

Disruption is large market change. This happens because disrupters are delivering better products and services. So how are they doing this?

In order to deliver disruptive services and products, we first need to fully understand the customer, their motivations, what they are trying to achieve and the frictions in their journey. People don’t want a bank, they want an easy way to manage their finances.

How to disrupt banking?

1. Identify the customer.
2. Identify customer frictions.
3. Move quickly to address those frictions.

If you are one of the big banks, how do you protect yourself against disruption? The answer is simple, be the disrupter. The best defence is a good offence.

Delivering meaningful disruptive innovation is difficult for established organisations. This type of innovation requires a space outside of established organisational norms and restrictions to provide room for organisations to fundamentally challenge their accepted norms.

Collaborative solution
One way to circumvent the time required for organisational change at this scale is to work with external partners.

Fintech startups are sometimes painted as the opposition, competitors that are looking to take your market share. But this isn’t always the case. As Chris Skinner, an independent commentator on the financial markets and the chairman of the Financial Services Club has said, “By partnering with finch startups, banks give their account holders the right measure of security and speed. Account holders can know that their money is safe, and they can enjoy the latest financial technology. This is the way to become a digital bank.”

Working with companies that exist outside of your organisational restrictions allows you to innovate at a pace you may never match internally.

External partners are free of the politics, process and vested interest you and your employees have. This allows them to really challenge in a way that your own employees often can’t.

Using agile approaches, tools and technology you’re more likely to find in startups than large established business, there are external players who  are not restricted by their client’s processes. As a result, they can become a critical friend, who is not afraid to ask the difficult questions. Not being tied to business as the usual activity there’s also the advantage of being able to move at a faster pace, taking projects down from months to weeks.

If you’re still on the fence about taking a collaborative approach to get your bank fit for the future, here’s a round-up of some key benefits that might help you decide, one way, or the other:

1. Partnering with an agile startup can shave weeks off your total development timeline, bringing projects to fruition in weeks, not months or years
2. External partners can help you get a fresh perspective of your organisation, opening your eyes to the real areas that need change
3. Your commitment to your customers’ security won’t be compromised – they’ll still feel safe, and will also feel the benefit of the latest technologies
4. The layers of change you need to implement to existing legacy systems will most likely be costly and time-consuming – with a ‘joined-up force’, you’ll navigate these layers quickly and cost effectively, and will invariably improve both the user experience and functionality