To keep up, banks have to innovate. But after 2008, much of the banking industry was focused on survival: regulatory change, cost control and the pressure to restore revenues against high fixed-cost structures.
FinTech introduced a different form of competition. Startups, often operating with venture capital and narrow use cases, could accept the possibility of failure in ways that large banks could not. They could attack profitable positions in the value chain without carrying the same legacy burden.
Why are banks so rigid when it comes to decision making?
The strategic choice is straightforward. Banks can maintain existing operating budgets and treat innovation as an additional funding exercise, or they can reallocate resources towards innovation.
A more pragmatic approach is to make relatively small tactical investments while adjusting strategic development around larger technology trends. That can give banks experience without requiring them to bet the institution on every new idea.
The greater danger is systemic disintermediation. FinTech can compress the time available to respond, while legacy systems can remain in place long after they have ceased to provide a competitive advantage. Banks should therefore shorten strategic planning cycles and treat change as an operating capability rather than an occasional project.
Why are banks still stuck in a bureaucratic trap?
One reason FinTech has moved quickly is that its organisations have fewer layers of bureaucracy. Alternative finance, for example, developed partly because new platforms were able to build outside traditional structures.
Constant change was becoming the new normal in financial services. Banks could not respond simply by following every emerging trend.
Institutionalising change
Many banks seemed to be concentrating on the customer interface while leaving the deeper operating model relatively untouched. That is a follower mentality rather than a mover mentality.
The changes created by FinTech are multidisciplinary and difficult to implement. New operating models can themselves be disruptive. Banks therefore need to institutionalise change agility: the ability to make, test and scale decisions faster without abandoning the controls that financial institutions require.