Fintech startups are “cannibalizing banks,” attacking every single service typically provided by financial institutions ranging from lending to wealth management among many other areas. Their key strengths: they understand much better the real consumers’ needs and “excel” in meeting those needs, according to IT consulting firm OCTO Technology.

In a white paper called ‘Fintech is Cannibalizing Banks,’ the France-headquartered consulting firm argues that in a world that is changing at the pace of technology, the digital era will not spare any industry, and especially not the financial and banking industry.

Since the subprime crisis, governments have been calling for more competition in a rather exclusive industry, leading to the emergence of new players. And these players “will destroy banking as we know it today,” according to OCTO Technology.

By leveraging technology, fintech startups are more efficient and able to provide services at a much cheaper cost, and thus price.

While incumbent banks and financial institutions often lack an innovative mindset, fintech startups are here to “fill the black spaces … by innovating and by reinventing sometimes the way of doing business.” Most importantly, these startups are actually listening to their users’ needs and are focused on facilitating their lives.

In lending, companies such as Kabbage and OnDesk are reinventing how small businesses get funded, notably by introducing new credit score systems.

For individuals, Lending Club and Prosper directly connect lenders to investors by providing peer-to-peer lending platforms.

In the payments area, services such as Square or Stripe, are providing businesses with a much simpler and cheaper way of accepting Internet payments.

As claimed by OCTO Technology:

“Square has brought in a payment solution for businesses … that is enabling enterprises that aren’t equipped to have access to a payment solution via mobile phone.

“Stripe offers simultaneously a better user experience for the end user and a better developer experience for merchant sites which can implement the solution via its API.”

In wealth management, players such as Wealthfront or Personal Capital have proved that wealthy people are willing to confine their fortunes to non-banks. Their common point is that they are both digitalizing consulting and wealth management.

Banking as we know it is being disrupted by startups such as Simple, Moven and Fidor Bank, which are offering apps instead of traditional branches. Some of these players aren’t bothering with the heavy regulation that banks are subject to, arguing that regulators should adjust the rather outdated requirements to keep up with new business models.

In the US, Simple is partnered with BankCorp, which provides the startup with both its precious banking license and the management of its back-office.

German Fidor Bank on the other hand, applied for a banking license, which it obtained in 2009 following 18 months of review.

Digital Banking “Must-Dos”

Given the fierce competitive environment, what are the options left for banks?

Well, OCTO Technology recommends plainly that they should update themselves to meet the challenges of the digitalization of banking and cites six must-dos:

Become “data-driven”: Data should be banks’ main preoccupation notably for marketing purposes. Services such as CardLytics and Cardlinkin offer solutions that allow banks to build customer loyalty.

Work on Big Data: Being data-driven implies that banks need to invest in relevant technologies such as cloud storage. Additionally, it is important to start exploring the field of cross-referencing data.

Conceive real-time architectures: To meet users need for real-time information and access, it is important to invest in technologies that allow instant interactions.

Integrate social media: Social media are essential to engage with prospects and create value. Fidor Bank has excelled in the matter with a customer acquisition cost of only 25 € compared to US$300 for traditional banks in the US.

Focus on “Open Innovation”: The Open Innovation approach consists in developing and exposing tools and services as self-services to third parties and often takes the form of an API.

Stay alert: Banks should actively monitor developments and regularly release Proof-of-Concepts. They should also attend fintech events such as Finovate or FinDev and participate or even organize fintech incubation programs and hackathons.

Read OCTO Technology’s ‘Digital Banking – Fintech is Cannibalizing Banks’ report: http://www.octo.com/en/publications/14-digital-banking-fintech-is-cannibalizing-banks

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