True innovations are a serious problem for traditional financial institutions, but fintech and crypto startups have the solution.
When banks finally come to improve their technology experience, they go no deeper than changing the front end. They’ll make a button blue instead of green or create rounded edges on buttons instead of square ones. They think in terms of their interfaces, not the back end. If a bank were to truly innovate its technology, it’d dig deeper into the back end and transform its legacy technical infrastructure, which has been the same for decades. Few today even know how to work on those old programming languages of yesteryear, such as COBOL, so they’re stuck with upgrades that turn the software into a Frankenstein-esque abomination.
The big banks don’t do innovation in house. Big tech conglomerates don’t even innovate. They acquire new ideas, innovations and teams that have done the innovation already. When they want a new, undeveloped technology as part of their internal technology portfolio, they sometimes speak to journalists about it so that they start covering it, which gains interest from the market. And then startups begin working on the problem. They see the opportunity and start raising funds in an attempt to execute, and big tech companies just observe. And then, one or two years later, they acquire the best company in the space and make it a part of their conglomerates.
The traditional model for Big Tech development strategy is to acquire already successful startups, as they can do this without any risk. They pay a bit more, but they don’t have a risk of failure. The startup and its investors take on all the risk. Facebook, for example, bought Instagram in 2012 and WhatsApp in 2014 for exactly this reason. And these purchases led to serious concerns about Facebook’s “data monopoly.”
Financial companies take this approach, as well. All the big players have acceleration programs for this reason. They find startups, which have ideas they might want to incorporate in the future, and they provide them with certain resources. Big financial institutions then buy the ideas once they are developed so as to implement them.
If a big bank tried to implement a new technology in-house, it might not work. The corporate structure is so rigid, it can’t adapt to new innovations woven into the framework of the bank’s already existing technology and protocols. Without the agility and flexibility, it can’t take the risk of developing and incorporating new technologies. The corporate structure does not innovate well. It commercially adopts — that is, co-opts — much of the innovation it needs through mergers and acquisitions.
Banks should focus on implementing the innovations of the fintech world — particularly, those that ensure customer privacy and provide secure purchases. When the bank tries to acquire products, it should acquire the team and the corporate infrastructure, as well. That’s how the bank could begin smoothly changing its core processes. Examples of this already exist. In one model, the bank arranges secure purchases while working with personal data and transactions, while a fintech acquires customers and provides customer service.
The revised Payment Services Directive 2 initiative, commonly referred to as PSD2, is a European regulation for electronic payment services, aiming to make payments more secure and boost innovation in Europe. PSD2 divides all the financial businesses into two parts: the first one is infrastructure and security, and the second one is the front end and innovative customer care. This is a better approach for now, but in the future, improvements will be demanded.
Small payment services such as Revolut, Monzo, N26 and others are growing very fast. These startups are based on traditional financial structure — leaning on the banking licenses and payment service provider licenses of their partners — while incorporating innovations from the fintech world. These digital banks develop their competitive advantage and acquire customers in short order. This model works. Banks sit on a banking license and money and provide security while outsourcing a share of customer acquisition and customer care to leading fintech startups. This same model could bridge the gap between banks and crypto startups, as well.
When it comes to modern innovations, what should banks focus on incorporating? The answer is that on the current technological backbone deployed by banks, there isn’t a lot of user privacy. When we use a bank’s services, a staff member there still works with our transaction history, obtaining more information than is on our social media profiles. Who likes it when someone has access to such sensitive data? Probably nobody. Regardless, banks currently sell this data and information. In certain jurisdictions, they can sell information about personal transactions.
When you have the transaction history of a user, you know everything about them, especially in this digital world as cash is seemingly being phased out. Take car insurance as an example. If an entity knows when someone’s insurance expires, it can start showing that person car insurance ads or upselling them. When a client pays for, say, a COVID-19 test, you can begin advertising therapeutics to them. You can also know how many children a person has, their gender, and so on.
European banks sell this data within the purview of the General Data Protection Regulation, or GDPR. This data is a huge profit center for banks. And that value could grow to be far greater than what the bank earns from transaction commissions, credit conditions and its old profit centers.
The financial history of their clients brings immense value to the banks, and the banks know it. That’s why they are so focused on big data and artificial intelligence. It is not only banks, to be sure, that have sensitive data on their customers. Mobile carriers, too, for instance, could know where their clients are at all times. While GDPR is a step in the right direction, it should be stricter for this reason. Perhaps, companies working with private data should be required to obtain insurance.
It is time for big banks to move beyond new furniture and truly innovate. Regardless of how ergonomic the branch’s new couch is, the world is demanding better banking. And by partnering with crypto startups, big banks will be able to offer improved efficiency and user privacy.
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