One unexpected outcome of the recent set of U.S. bank runs is that it may help the banking industry in its fierce battle with upstart fintech competitors.
On the surface, the brick-and-mortar banking business has seldom looked more vulnerable to disruption. Bank runs that led to failures have heightened customer anxieties, adding to years of frustration over plodding service, high costs and low deposit interest rates.
But while the competitive threat from “neobanks” and other financial technology companies is real, traditional banks, especially the larger variety, still retain significant characteristics that offer value to both commercial and retail customers.
Top among these, perhaps ironically, is a sense of safety. Despite the recent shutdowns/forced sales of Silicon Valley and First Republic Banks, the very fact that banks are perceived as slow and stodgy are attributes that tend to ease customers’ minds during a time of heightened risk.
Fintechs, whose fast innovation cycles are unencumbered by legacy technology, arcane practices and strict regulations, have dramatically raised the bar of competition for banks. Their lower service fees and higher returns on deposits have fueled strong customer satisfaction grades and have helped them grab market share from banks.
But there are areas in which incumbents retain an edge – including the ability for a customer to meet bank employees face to face. And with a big jump in the cost of capital threatening the viability of some fintechs, now is a good time to look at some of the ways traditional banks are worth emulating.
Regulation: Banks are subject to more stringent regulations than many fintechs are. What’s more, most of the challengers are so new that they don’t have the experience of surviving banking crises, or even recessions when loan growth dwindles. Neobanks and fintechs can't afford to underestimate the desire of consumers to know that their money is safe. And this is especially the case in times of heightened unease.
Addressing such concerns isn’t as easy as indicating that customer accounts are backed by deposits covered by required capital ratios. Such messages need to be communicated expertly and often, which is what much bank marketing has been focused on for decades.
Safety vs. convenience: Fintechs have been consumer-focused and technologically flashy, whereas banks have often been safety-focused and technologically plodding. But fintechs have a delicate balance to strike to develop and maintain systems to enhance trust. Features like biometric log-in can make some users feel more secure, but if a fintech’s core proposition is speed and convenience, friction may actually erode trust for some subset of customers.
Data protection: Meanwhile, it is a mistake to sell short the work done by legacy banks on other aspects of customer safety. For years they have lived in fear of data breaches, leading them to devote billions of dollars and countless employee-hours to prevent the unauthorized release of customer information. Fintechs, on the other hand, bring higher security risks, including cybersecurity and those from third parties.
Fraud prevention: Likewise with fraud. Fintechs can, and should, match or exceed legacy institutions’ efforts in this area by using artificial intelligence to detect fraud and warn customers of potential scams.
The boring image of legacy banks might be an inspiration in a time when many consumers are feeling pinched. Some fintech products may need to pivot from gamification and trading to tools that help customers keep to a budget and other bread-and-butter services.
And despite being technology companies, fintechs might emulate traditional banks in not feeling the need to make every piece of their tech stack themselves. As customer needs become more diverse and pronounced, and financial markets overall more complex, the logic for using third-party services grows more compelling.
Above all, fintechs need to remember that, regardless of the innovative ways they are creating value, they need to make sure to do the basics as well or better than traditional financial institutions. That is something you can bank on.