They are big, they are rich, they have resources. Yet many of them just can’t bring anything new to the world of finances they are in, while small startups can. What keeps some banks from innovating?
Banking used to be quite a simple thing: take money from the ones who have a surplus of it and then give it to those in need. Of course, not for free. This straightforward business became more and more sophisticated as centuries went by, reaching peaks of its complexity at the end of the 1990s when deregulation allowed traditional banks to invest a lot in the financial market and run operations globally.
But the basics for individuals remained almost intact. Accounts, savings, loans , mortgages, debit/credit cards, and transfers — all of it was and is still here. It may seem there’s nothing much to change in these products but interests and fees. And this is the way most banks see their business, focusing only on these basic, standard products and services, and being competitive just by adjusting profit margins on their offer — which, to be precise, is not the lowest possible to achieve.
Fortunately, with the advance in technologies, traditional banking moved to the Internet and then to mobile. What once was a closed, brick-and-mortar infrastructure, all of a sudden became just another online service, which can be provided by almost anyone and powered by existing banks or total newcomers on the financial market, who find better solutions or user experiences and offer better deals.
Take wire transfers for instance. For decades they were painful to make, took days to execute and cost unreasonable money, especially for international operations. When banks went online, new players begin to serve as middlemen for instant transfers by opening accounts in as many banks as possible and, with a help of software, managing funds among these accounts. Banks wouldn’t do that because they were happy with services of clearing houses. Meanwhile, third parties realized what customers wanted: to speed up the process and make it less expensive.
Payments are another example of what banks couldn’t (or didn’t want to) simplify and make user-friendly. A huge boom of e-commerce at the beginning of the 21st century was completely neglected by banks, which were not able to offer anything else but classic transfers and credit card payments. They were not interested in providing new services to individuals wanting to buy and sell things online with secure, simple and fast payment options.
They would insist on sending checks or transfers in advance, choosing more expensive COD shipping or giving away credit card details in emails or on the phone. Banks would still make their cut on it, especially when a small merchant wanted to accept credit cards, so why bother with inventing something better suited for this purpose? Well, they didn’t bother, but thanks to technology they no longer were the only ones who could offer financial services to online shoppers and sellers.
And so PayPal made its way to the market, followed by others such as Worldpay, Stripe, Skrill, PayU, Square, GoCardless, just to name a few. And it is hard to predict how the scene will change with the introduction of banking APIs that the banks are obliged to share.
For centuries banks competed only with each other — the new ones and the old — and did it with typical price/margin cuts, not with innovation . Even a credit card was not a bank’s invention: merchants used its predecessors to identify their clients’ charge accounts. After a couple of decades, it evolved into the shape of a card and was then embraced by the Californian branch of Bank of America.
On the other hand, newcomers from outside of the financial world find a niche that was neglected by banks, develop a solution for them and then do whatever they can to popularize and monetize their product. They don’t have another source of income, so they have to focus on what they want to deliver.
The final product must be one of a kind or at least stand out from competitive designs. But first and foremost it has to address somebody’s needs — an individual customer, an entrepreneur, a company, you name it — that was not met by bank products and services. Banks often don’t see those needs or simply think their offer is perfectly suited for everyone. Even if they are aware of some shortcomings or potential market opportunities, they are reluctant to allocate resources to risky projects with expected returns lower than from their core business.
Meanwhile, for small fintech companies, the money they can make on such projects is very tempting and teams of committed and passionate developers strive to make the best out of the given chance. Perhaps this is the answer: for banks, any innovation will be just another project, one of the dozens they run, and most probably it won’t determine their future. For challengers, the innovation is their only weapon, the key to market success. There is no better motivation to think different than to know that you just have no other option — either you innovate or fail.