Ross Hignett, Director of Financial Services gauges the response of traditional banks and financial institutions to the growing challenge of disruption from digital-native start-ups.

It’s tempting to think of the traditional financial services sector like an oil tanker, desperately trying to change direction towards a more digital future, before all its cargo is siphoned off by fast-moving challenger brands. A strong headwind (caused by increased regulation), and high waves (reflecting the turbulence of cyberattack) impede its progress further.

Over the last 12 months, the tanker has started to make up ground. Having recognised the impact of outdated legacy systems, many financial institutions (FIs) are investing seriously in digital transformation programmes. Some have replaced their systems entirely, while others have chosen a more incremental and agile approach by adding micro-services where they are needed most. Whilst upgrading their customer experience, they have also automated many of the routine tasks for bank staff.

All FIs are digitising their customer journeys end-to-end, and scaling-up digital transformation. They are finding more agile ways of working, boosting productivity, building key skills of the future in-house and modernising with targeted investment in technology, data and information.

Tech-first approach is the only approach

How banks leverage Blockchain, artificial intelligence (AI) and cloud technology will determine their ability to tackle cyber risk and compete with highly scalable alternative lending providers, who are reducing the lending cycle down from a few weeks to a few hours.

The threat from digital-only challenger banks remains strong, especially with the number of digital-native customers growing year-on-year. The speed and convenience of online services powered by AI makes perfect sense to the next generation of account holders. Indeed, AI has had a good year, becoming a mainstream tool in expected areas such as wealth management and robo-investment, but also helping to deliver better performance in sales and marketing teams.

Risk management and compliance is another department that is looking to cognitive technology such as RegTech. Balancing the rewards of innovation with the challenges of regulation complexity, data protection and cybersecurity is increasingly dependent on machine learning – especially with growing reliance on cloud services and service outsourcing.

Fintech has continued to chip away at the foundations of the banking establishment, making progress in growth industries such as peer-to-peer payments, paper-free banking, speedy lending based on alternative credit checks, and mobile tools that put the customer in control. Likewise, they are redesigning the aesthetics and mechanics of the customer experience, making personal finance feel more akin to ordering a pizza or hailing a taxi.

Partnerships are the way forward

Many of the capabilities that banks need to rapidly evolve their service are becoming available in the Fintech market, such as products for cognitive banking, credit scoring, quantitative trading, predictive analysis, fraud detection and debt collection, underpinned by technologies like Blockchain. Traditional banks are responding by partnering or acquiring start-ups. Likewise, as entrepreneurs face the reality of scaling up their smart idea, the large customer bases of established brands can prove a tempting compromise.

Digital technology is both the headache and the potential remedy for major players in the financial services industry, with strong and courageous leadership needed to strike the right balance of risk and reward. Those that can adapt to changing customer expectations, both affordably and securely, will set the pace in the 2020s. The new wave of technology that threatened to capsize traditional banks could yet end up providing the fresh impetus they need to consolidate their position within digital society.

Download the Expleo 2019 Financial Services Trend report here.