EXCLUSIVE: ‘A life and death fight for the relevance of banking …and how to win it!’ – Kunal Galav and David Alstadter, Mambu; Peter Hazou, Microsoft in ‘The Fintech Magazine’
After much posturing and sabre-rattling, the past decade’s standoff between incumbent banks and fintechs has simmered down into a grudging peace.
Olive branches have been tentatively extended in the form of incubators and partnerships. Mergers and acquisitions have made allies of would-be adversaries. The sector’s even working up a kind of UN, with open banking initiatives promising shared prosperity and opportunity for all. But while it may seem all quiet on the fintech front, both sides of this phony war are intent on capturing the other’s castle. Traditional banks still long for the dynamism and slick products of the neobanks, while they in turn covet the trust (and deposits) that consumers continue to place in centuries-old financial institutions. These battle lines are shifting, though, in step with consumer expectations, which are rapidly evolving in the wake of the pandemic.
According to former banker Peter Hazou, who now heads up core banking as a solution at Microsoft, the sector is facing ‘a life and death fight for the relevance of banking’. We sat him down with Kunal Galav and David Alstadter, both from Mambu, the Berlin-based SaaS Cloud banking platform, to sketch out tactics in this battle for survival.
Galav and Alstadter bring with them their own crystal balls, given that Mambu’s tagline is ‘ready for what’s next’. The composable banking firm is in harmony with Hazou’s stark prediction. Its recent report on the future of retail banking, conducted alongside Financial Times Focus, bears the title Evolve Or Be Extinct. In a survey of senior bank executives, the report found 58 per cent believed their banks ‘will cease to exist in the next five to 10 years if they don’t change their business model’. Some 67 per cent expect to lose market share within two years if they don’t digitise. The long grass into which executives may dearly wish to kick this ball looks a lot like a kill-zone for careless incumbents. Why this ramping up of paranoia?
Well, we’ve been through banking’s ‘unbundling’ phase, with fintechs seizing certain under-served and disillusioned customer segments from incumbents by offering them specific product lines and services. Big banks have responded by mimicking the neos’ technology – and particularly their UX. The fintechs have now also begun to feel investor heat. With so few having turned a profit – OakNorth and Starling being honourable exceptions among the first cohort in the UK – they are under pressure to put more customer bums on seats and broaden their offer by bolting on additional services. They’re rebundling in effect, so that they begin to look a lot like the banks they sought to depose. And now banks in both camps face a common enemy: embedded financial services that shift the customer interface away from banks altogether.
As Galav, Mambu’s regional director for advisory in EMEA, puts it: “It was brilliant, back when Monzo came about: simple, intuitive UI, and you could sign up to an account in minutes. But now that’s table stakes. Everybody has done it. The learning curve is no longer that steep. It’s now about who can really address what the customer is looking for.” So, with the battle lines now less distinct and banks of all stripes in survival mode, what are the five winning tactics the experts from Mambu and Microsoft believe should be employed?
Win hearts and minds
At the beginning of 2020, Mambu was selected by TNEX, the world’s first ‘gametech’ digital bank designed ‘exclusively for Vietnamese youth’, to build out its core product. A speedboat that was launched by Vietnam-based Maritime Bank (MSB), itself only founded in 1991, TNEX targets the 70 per cent of Vietnamese people who are aged 35 and under. Its 2021 launch has been a huge success: International Finance magazine voted it Best New Digital Bank in 2021.
“During the pandemic, TNEX realised mental health and physical health were becoming really important for the Gen Z customers it was targeting. So, they tied in questions like, ‘how are you feeling today?’ and ‘are you exercising enough?’ with the products they were offering,” says Galav.
It’s that kind of sticky innovation, targeted at an audience that banks truly understand, that’ll help them differentiate, says David Alstadter, global head of strategic partnerships at Mambu.
“At the end of the day, if banks aren’t delivering value to end users, they will end up finding an alternative. Consumers haven’t had that opportunity before. In the past, banks had the big building, the vault, the armed guards, and everybody knew it was safe to keep their money there. That’s just the way it worked for generations. Now there’s just so much choice.”
“And the culture around us is changing, too,” points out Microsoft’s Hazou. “The whole thinking about the society in which we live. ESG (environment, social and governance) isn’t just a slogan printed on the side of coffee cups in banks; it’s a real concern in society, and that drives a lot of changes, a lot of expectation.”
Beyond this, it’s clear that consumers now want banks to work around them – upturning what was the traditional, reverse model. “Banks were at the heart of society, driving economies,” says Galav. “But now the customer is at the heart.”
If banks can sense a creeping irrelevance, it’s because the prevailing winds blowing through society aren’t catching their sails. Those that don’t change course, winning the hearts and minds of consumers, risk drifting into irrelevance. But who, exactly, is at the helm?
Empower visionary leaders
Speedboats like TNEX are more naturally dynamic than their inelegant motherships, or so the logic goes. But looking at incumbents’ slow pace of change in terms of size might be missing the point. According to Hazou, a bank’s turning circle is as much about the person behind the wheel as it is about the size of the vessel. Success in the coming battle ‘belongs strategically to product management’, says Hazou. “But I think one of the problems with bank product managers is that they’ve been beaten down for years. They have lots of ideas, they meet lots of customers, they go to lots of conferences. But, when it comes to the annual cycle of the budget – where they put forward their ideas – they just get demolished.”
It’s difficult to avoid reaching for the ‘led by donkeys’ analogy, casting key decision-makers in some banks as fusty public-school generals, scoffing at the suggestions of subordinates, even though they are closer to what’s actually happening on the ground. But that traditional hierarchy can change.
“Banks need to think about creating true product managers,” says Galav. “Unlike a tech company, where the product is the product, banks have a financial product and a technology product. The problem is, banks haven’t reconciled the two.
“They need technology that can be configured by someone who understands the customer as well as how calculation works, how interest rates work – without needing to go through a change request and a six-month transformation programme. So, leaders of banks also need to reconcile the differences between the two sides of product management, to create true product managers.”
These empowered employees also need the CFO in their corner to push through the kinds of products they believe will turn the tide in the bank’s favour. Straddling several business lines as well as protecting the company purse, chief financial officers are a critical node, and naturally cautious, but product managers may win them over by engaging with dynamic SaaS plug-ins, instead of proposing ambitious – and risky – in-house features.
Take calculated risks
Risk aversion is baked into the business model of banks. Built on trust, banks are petrified of squandering that asset by developing digital processes and products too quickly or with too much ambition and too little due diligence and testing. As a result, they become entrenched – rather than innovating their way out of a rut.
“It comes down to risk appetite,” confirms Alstadter. “How far can you go, and at what pace? That’s the key of the struggle – not to make a big misstep, because that can be really disastrous, especially with cybercrime.” Even small missteps, or projects and programmes that end up delivering less than they cost, make their imprint on a CFO’s psyche.
“A lot of times you’ll see banks say ‘oh, that didn’t work, and it cost so much money, and took so much time. That’s a failure – we won’t do that anymore,’” says Galav. “But it may just be that their timing was wrong.”
It doesn’t help that such projects take so long for banks to complete.
“Those big waterfall projects need to be rethought, rearchitected,” says Hazou. “You can’t have these big, two-year projects sucking up all the oxygen. You have to get a new product out in the next four weeks.”
And to get there, taking calculated risks on the new banking battlefield, they may wish to turn to the kind of composable architecture offered by Mambu.
“API enablement, an SaaS platform, and composable banking – they’re the keystone for building things quickly,” argues Alstadter. “I think it’s a given that banks have to adopt this – there’s no choice anymore.” Hazou agrees. “Things have got to be composable and easy to reach – it’s all about this kind of modernisation.”
If CFOs are traumatised by long-tail projects, engaging with SaaS providers like Mambu might help product managers get their ambitious ideas over the line.
Experiment with strategies
Banks seeking to innovate while maintaining trust have typically followed Maritime Bank’s model of releasing a more digital-savvy offshoot. “They launch a separate brand, or a separate bank – you can call it a speedboat or a greenfield approach – to give customers new, innovative experiences,” says Galav.
But there’s a big cultural issue there: how do you keep the mothership and the neo together? The worst thing that you can offer customers is a disjointed journey.
While TNEX has been a wildly successful raiding party for Maritime Bank, banks needn’t necessarily keep the bulk of their armies in reserve when experimenting with new product lines.
“Once banks adopt a software-as-a-service approach, they can dynamically try a new product or business model, in a market or in multiple markets, to do testing,” says Galav. “It takes a lot less time to spin it up, and to spin it back down if it’s not working. If it’s working, great – put more effort behind it. If it’s not, you can sunset it and try something different.”
Alstadter is confident that this will help banks test entirely new business models as well as products. “In the near to mid-term future, SaaS platforms will be inevitable in everything. That’s just the way the world is moving. It’ll allow people to try different business models,” he says.
“If you look at the big payment service providers, using data and analytics as value-added services accounts for 17 per cent of their revenue,” Galav adds. “So it’s already happening. Payment services providers who are modernising really fast have discovered new revenue models and new revenue sources.”
For Alstadter, that should lead core banking executives to reassess their entire value chain: “Nothing is sacred. Everything should be under review.” SaaS-driven composable banking gives incumbents the power to respond to the massed ranks of alternative providers gathering on the horizon, too.
“Are all these new business models known? No. But the whole point is, the easier route to delivery through SaaS also frees up the oxygen for new business model development, new things to come, new ideas, and new ways to compete,” says Hazou.
Fight for relevance
Firms tend to conflate new technology with new revenue streams. They wield innovative technology as a hammer and go searching for nails. But, oftentimes, consumers aren’t moving to flashier fintechs for the strength of their back-end; they’re moving, based on how bank brands make them feel. That’s the real front line, along which banks can push via agile decision-making and engagement with SaaS platforms.
“As a consumer, I’ve had relationships with multiple banks,” says Alstadter. “Am I in love with any of them? Probably not. Do I see differentiation? Probably not. Do I trust the bank will keep my money safe? Yes. Do I feel aligned to the brands? No. Do I trust the bank has my best interests at heart? No.
“I may be a focus group of one, but if they can overcome that with me, where I actually feel like they have my best interests at heart, that’s a big step to aligning me with that brand. If I feel that way, I may start saying, ‘hey, you know me, you can recommend things to me, you can do things for me.’ I might even go as far as saying ‘I’ll let you decide for me.’”
Hazou is in agreement that there’s something far more fundamental that banks need to grapple with in the near term if they still hope to be here in the long term.
“Technology is an enabler, but one has to think broadly,” he says. “The fight for relevance in the value chain is really the guiding light. There’s lots of cool technology, but the framework isn’t ‘what do we do with the technology?’ The framework is, ‘what’s happening around us, and how can technology help in that?’.”
What’s happening around all of us right now remains unprecedented. Crystal balls have grown cloudy as a period of turbulence and change looks set to shake up more than just the financial sector. But Hazou, Galav and Alstadter are in agreement: it’s better to rearm and redeploy now than to come off second best in what may be, for some banks, a competition that leaves them irrelevant.
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