Since the 2008 financial crisis, the competition in one of the world’s largest industries has increased more than ever and disruption of the aged and sometimes monopolistic industry of banking is now fully underway. Challenger banks, neo banks, and other Fintech firms are appearing from every corner, it seems, to race towards the digital transformation of banking.
Whether you are aiming for more market share or for banking the underbanked, growth opportunities are everywhere if traditional banks take advantage of the right channels, partnerships, and technology. Every day we hear of new Fintech companies aiming to disrupt the market and take advantage of the digital era. But what happens to legacy banks and what role do they play in this new banking era?
How can legacy banks achieve modernisation?
1. Act as a marketplace
To say that legacy banks don’t have modern technology is an oversimplification. Most legacy banks have technology, whether it is old, new, or unused. However, some of the technology that legacy banks have implemented over the last few decades has created a financial burden of cost and effort for keeping the technology operational.
The rise of open banking APIs has enabled Fintech to analyse bank account data to make recommendations on actions, behaviors, and services. Fintechs have used such technology to offer a wide range of products within a short period of time and gather a relatively huge customer base all in the digital environment.
So, what should legacy banks do? Should they focus on creating new technology to compete with Fintech? Should they change their operating models to please the digital era customers?
At the end of the day, most customers don’t care who made the product. The only request that they have is for the user interface (UI) and user experience (UX) to be up to standard. With the rise of new Fintech every day, legacy banks can become marketplaces where financial products can be bought and integrated into digitally savvy Fintech companies.
2. Advice and guidance
The greatest value of any large legacy bank is its customer franchise, that is, its cumulative image built up over years and decades of work. This is a value that no Fintech can hope to replicate without huge spending and similar years of work. On the other side, Fintech companies struggle with establishing a reputation for stability,, gaining trust, and implementing processes that make banking more efficient.
Legacy banks can set themselves up to be able to play in every stage of the value chain: customer acquisition, brand relationship, product development, and distribution. Legacy banks hold expertise and experience while Fintech companies face the challenge of making modest inroads in the industry. Legacy banks can position themselves as the guidance providers for newly developed financial institutions.
3. Embracing the new technology
Most legacy banks are full of, well, legacy technology for their operations like account management. To embrace modernisation, legacy banks need to hollow out non-core applications to allow for new, modern, ready-made technology to update the existing operations without spending months – if not years – in implementing a new program.
To give an example, a legacy bank might hollow out its 10-year-old account management system to replace it with a cloud-based application. Not only does this reduce the costs to maintain such functionality but also the cloud-based system allows for easier implementation of new features and updates.
4. Flexible user journey
Legacy banks are known for a “One-Size-Fits-All” model that was the main banking model for almost 100 years. However, as technology has progressed and the world has become more connected, many companies have recognised the need to take advantage of the digital era to provide more personalised financial services.
By disregarding the “one-size-fits-all” model, many Fintech companies have been focusing on providing a more seamless banking experience. One key aspect of this has been the implementation of the user journey. This has helped many Fintech companies to acquire huge amounts of customers as their platform is easier to use.
A recent study counted the number of clicks required to open a bank account, and found that some legacy banks require close to 100 clicks – or even more – while Fintech companies like Revolut require only 24 clicks.
The ease of finding one’s way through the process, completing forms, and filling out the questions, all affects the user experience. If one company requires five times less effort from the customer they are already doing better in today’s digital era.
5. Global platforms for customization
With all the resources that legacy banks have at their disposal, their possibilities for innovation are growing exponentially. One route that legacy banks can take to embrace modernisation is to create and provide platforms for local customization. For example, a legacy bank might provide a ready-made functional internet banking platform for a Fintech company to use for the local market.
Because legacy banks have everything in place, they can offer different types of platforms at the same time. For example, they could offer an internet banking interface, credit-issuing systems, and account management. By building global platforms that are easy to customise to local markets, and providing them to Fintech, legacy banks can capture greater value because of the Fintech brand, culture, and approach to banking. By providing ready-made products, the legacy banks reduce costs for expansion and customer acquisition, while still generating revenue through their different platforms.
Legacy banks that can successfully change their operating model and technology will find an entry point in today’s digital banking era. To reach this future, institutions must commit to the new operating model that boosts their ability to scale operations and serve customers more efficiently. It is important to recognise that embracing technology will not be enough to compete with the new competitors. Culture, branding, and real value must be provided to attract customers.