Fintech challengers are garnering media attention and taking some market share. Should established banks and insurers be copying their models?
For a long time, established financial institutions have led the way for changes in the industry, innovating and developing new products. However, as technology progresses, there’s a perception that these companies are being left behind while innovation comes from a new wave of disrupters – the Monzos, Revoluts, and Starlings of the banking world.
The question is, then, should established financial institutions be acting like challengers to compete with fintech, or continue doing what they have been doing for so many years?
With the rapid rise of fintech companies and the introduction of robo-advisors, many people have been asking the same question: ‘what does this mean for traditional banks and insurance companies?’
On the one hand, you have banks like HSBC and insurance companies like Lloyds. These have been in business for hundreds of years and are woven into the fabric of our culture. They’ve played crucial roles in historical events. Perhaps the strongest demonstration of their staying power is that they’ve been around longer than computers and the internet.
As such, they have the trust and respect of consumers worldwide, and enough money and momentum to go on seemingly indefinitely. Yet, they are also hampered by core technology that was developed a long time ago and has, frankly, surpassed its use-by date. It isn’t fit for purpose and won’t last forever.
On the other hand, you have disruptors like Lemonade and Revolut. These are small firms built in the digital age with innovative technology. They are entering the financial technology race in speedboats while their competition is paddling canoes. At the same time, they are still at startup level, trying to win customers and work their way out of debt.
The question for established financial institutions is: should they be acting like a challenger to compete with fintech startups that are taking market share away from them?
It’s easy for established financial institutions to feel envious of the agility and digital capabilities of the startups, but does that mean established banks and insurers should be trying to emulate their smaller rivals? Yes and no.
As much as there’s excited conversation about the disruption from the newer breed of financial companies, fintech startups aren’t much of a threat to their bigger contemporaries:
The threat to incumbent insurers is much overdone. They have a lot of money and, if they really feel threatened by something, they’ll buy it. That’s why partnerships are completely the key.
Large financial institutions shouldn’t be giving up their size and power to become small and agile, as that very power and reputation are what the startups want so badly.
It is not uncommon for large established financial institutions to be overlooked in the never-ending search for the next big thing, but this is a mistake. Large financial institutions have a huge advantage when it comes to providing services that are reliable, trustworthy, and have been around for decades – and people know this. These large firms have a reputation that cannot be matched by startups who are still unknown quantities in the industry.
If you are a startup, your first foray into a market like this can make it difficult to find your place among the giants. However, once you’re established, it’s much easier. Likely the best way to gain access is to partner with an existing company in that industry. Large companies also have a lot of access to deals and information that smaller companies can’t access as easily.
Startups are the canaries in the mines of industry disruption. Fintechs are actively trying to disrupt the industry, which is a huge risk on ROI.
Why would incumbents take that risk when they can watch the startups – if the attempts fail, mistakes can be learned without losing capital; if they succeed, those established banks can either buy the successful startups and integrate their strengths into their own, or build their own version.
Either way, these fintech canaries undertake the market research and validate a product or market, and other companies can act on it.
What the incumbents can’t (or won’t) buy, they can replicate. Launching their own version of successful digital products – backed by money, resources, and reputation, as well as reassurance that they can be successful – offers them a much easier time than the startups had.
The digital trend of replicating popular products is becoming more and more common. For example, banking apps have become an industry standard. Chatbots are basically expected for all banking companies now, too.
Brands are aware of the power and success behind the original product, and have chosen to mimic it by launching their own versions. These brands have the resources to back up their ideas, as well as a track record of success. They can offer reassurance that they will be able to succeed in this venture, which is important for customers.
There is, however, a problem.
Established financial institutions are still stuck with their old, outdated systems. This makes it difficult to integrate new technologies and processes without costly digital transformations, and means struggling to keep up with the changing pace of financial services.
Fintech has become one of the biggest trends in banking because it’s revolutionized personal finance. People are looking for faster, more convenient ways to get loans, pay their bills, see their spending, allocate their money towards different areas, and more. This has forced many banks to make costly updates to their systems so they can compete in this fast-paced industry.
So, for banks who want to compete, but face costly fees to replace their outdated core, what’s the solution?
By partnering with a fintech start-up, incumbents can learn the challenger mindset and share their own resources with the smaller firm, benefitting both. This way, established institutions can gain all the strengths of a neobank or insurtech without having to act like them.
All banks and insurers need is the right ‘digital glue’ to link these new products with your legacy systems without replacing your core. That digital glue is FintechOS’ high-productivity fintech infrastructure.
To find out more about HPFI, book a demo.
The threat to incumbent insurers is much overdone. They have a lot of money and, if they really feel threatened by something, they’ll buy it. That’s why partnerships are completely the key.
