Customer trust and regulatory compliance capabilities are banks' biggest weapons when it comes to fending off a potential threat from fintech companies, according to Temenos CEO David Arnott.
Like all industries, from retail to media, the banking sector faces a significant challenge from new competitors that are heavily focused on delivering digital services. For banking, this means everything from peer to peer lender startups to tech giants such as Apple and Google moving into payments.
The situation is made all the more difficult for the big banks as they must contend with complex legacy technology and face a wave of regulations, such as GDPR and PSD2.
However, one of the reasons that we are perhaps yet to see the 'Uber-moment' for banks is that they have a number of advantages over their nimble competitors. Speaking at the Temenos Community Forum in Lisbon, Arnott said that banks should focus on their core strengths if they are to succeed in an increasingly digital market: namely, many years of experience providing financial services to customers while navigating a rapidly shifting regulatory landscape.
He said banks must "take advantage of modern technology, and, crucially, take advantage of the biggest asset that you have: the customers, the data, the platforms."
He added: "You have gone through the pain of the regulations which allows you to take deposits, you have a balance sheet that allows you to lend. We have seen people play around the fringes, but, whilst they will help you download music, we are not going to see Apple helping you out when it comes to paying for your first house.
"So you do have that lock-in, you do have that customer-centricity."
Arnott said that there are a number of other methods of dealing with the changes that are facing the industry as regulations level the playing field for new entrants into the market. For example, the incoming PSD2 regulation requires banks to open up their data to third party provides via APIs.
However, these have various drawbacks. One is the traditional universal banking model, where a financial organisation 'manufactures' and distributes its own products over its own network, maintains its own regulatory environments and distributes through its own channels.
"The key here is today the majority of big banks are offering purely proprietary products," he said. "The challenge with this is where we see new entrants, who aren't necessarily taking market share. If you look two or three years ago, 90 percent of financial organisations were afraid of market share loss to fintech, today it is only 21 percent.
"What they are doing is impacting price. They are very disruptive, they have a different way of thinking, they come at subsets of ecosystems of financial services in a very different way, it is much more frictionless."
Another option is to become an "infrastructure player", providing lower-level services that others can build upon.
"You can become an infrastructure player, you can share the heavy burden of infrastructure costs, regulatory costs that you get running a financial organisation today with others," he said, adding that there are drawbacks to this approach too. "Ultimately though it is not a game-changer, it is a scale game. Yes, you can share some of your back-office costs, but ultimately it doesn't make you any different. There is no network effect, it is all about scale."
Another option is to become an aggregator of banking services.
"A fully fledged aggregator is somebody who pulls together, using their vast knowledge of a customer segment, a number of products that they don't own themselves and take a small term in recommending those products," Arnott explained. "It is like the TripAdvisor model, they used a network effect: vast volumes of recommendations matched with vast volumes of product and they sit in the middle and they take advantage of the network effect.
"The challenge is that this doesn't really take advantage of the key assets that we have today."
To provide customers with a range of options necessary to avoid these pitfalls, Arnott said banks require a modern technology infrastructure – a major challenge for some of the biggest banks – and be open to partnering and becoming a platform.
"First of all we need to provide modern banking infrastructure, so for transactions where the analytics goes straight through and we can give decisions quickly about key products," he said. "At the same you have to be open to the notion that a banking customer will want more than proprietary products. Certainly you offer a broader experience than the existing product set today."
While many banks have managed to keep pace with demand for new services such as mobile apps, this has generally meant delaying the inevitable requirement to modernise that tangle of legacy systems that many lenders own and operate.
"Putting digital channels on top of an ageing core is not enough," he said. "It will buy you a bit of time, but doesn't deliver value long term.
"There are those who understand it and those who don't, and they are spending fortunes on digital solutions on top of legacy and they are going to be caught out in a few years time, and I fear for those organisations."
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