In the face of growing competition, changing consumer expectations and the broader digitalization of our economy, incumbent financial institutions must embrace digital change and welcome the idea of partnering with digital enablers and fintechs, according to global business and technology consultancy firm Capco.

In a new paper, Capco urges banks and financial institutions to not underestimate the tech giants that are progressively entering the financial services industry, and begin to formulate a digital strategy in order to remain relevant while serving their stakeholders even better.

Embrace digital change

Leading Internet firms such as Google, Amazon, Alibaba and Facebook have fundamentally changed the way customers shop and interact with each other. These are providing services that are problem-solving, connected and fully integrated into our daily lives, and are quickly entering the fintech space, threatening incumbents that do not respond to digitalization fast enough.

Alibaba’s financial services affiliate Ant Financial is already the world’s most valuable fintech company, providing customers with a large spectrum of services ranging from digital payments to loans.

Tech giant Google is offering the Google Pay digital wallet service, and its investment arm GV is one of the most active investors in the US fintech industry with a portfolio that focuses on authentication, security, banking APIs, cryptocurrency, lending, payments and more.

Like Google, Apple is getting into the fintech game with the Apple Pay digital wallet which lets users make online payments and pay in-store. A study by Mulesoft revealed that almost a third of respondents in the UK, Belgium, Germany and the Netherlands would consider banking services from the so-called GAFA, or Google, Amazon, Facebook and Apple, and similar businesses, citing key criteria as simplicity, convenience and personalization.

Courage for partnerships

These disruptors are entering the financial services industry either by leveraging big user communities or providing innovative end-to-end services. While the major platforms such as Alibaba, Google and Facebook may pose real threats to traditional banks, smaller fintech companies can be considered valuable strategic partnering opportunities.

As clients expect solution-centric, uncluttered service offering, being open to partnerships and exchanging data and services with other providers in the industry has become a competitive advantage. Many institutions have already understood this, and are moving away from a model where almost all products and services are created and distributed by the institution itself. Strategic partnerships are established and alliances with new partners are formed to outsource certain elements of the value chain.

On the other hand, more and more institutions are identifying best-in-class in-house services as white-labelling opportunities that can be provided to the wider industry. According to Capco, 59% of Swiss financial institutions have partnered with fintechs. Successful collaborations include for instance robo-advisory platform Digifolio, the result of a collaboration between Zurich-based fintech startup True Wealth and Basellandschaftliche Kantonalbank, ELVIA e-invest, another robo-advisory created by Allianz Suisse using additiv’s SaaS platform, and most recently the partnership between Credit Suisse and Mesitis to provide the bank’s clients with the ability access Canopy, an automated account aggregation platform and reporting solution.

Pick your change drivers

The digitalization of our economy is something we must not consider lightly, and those who look pass these emerging trends will be left out, according to the paper. It is crucial for incumbent financial institutions to set out a clear strategy on how they will tackle digitalization and differentiate themselves from competitors, whether that’s by disintermediation, cost transparency or by focusing on specific demographics.

One area in particular that must be a focus for bankers is improving the legacy infrastructure. Improving client experience, digitizing key processes front-to-back and using robotic process automation are the common pillars of this strategy. Technologies such as APIs enable banks with various level of technical sophistication to distribute data and services and connect to clients efficiently. Distributed ledger technology or blockchain is disrupting how information is stored and distributed. It can serve as a common banking ledger that provides banks with seamless access to a standard set of data and services with a real potential for cost optimization and efficiency gains.

Featured image via capco.com