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A State of Equalization

By Jay Mossman 11 Jul 2017

Let's be clear, fintech isn't new. If there hadn't been technology advancements in the financial arena, then where did the what-are-now legacy systems come from? If fintech, and the innovation it represents, didn't previously exist, how did the incumbent core providers start?

Fintech is not new, but we are in a new wave of innovation. Like every wave it must equalize and then ebb in order for a new wave to come. What we are seeing in the industry right now is the transition from wave to equalization.

Over the years, financial organizations have equalized and then ebbed, and now they have found that they are behind the new wave instead of capitalizing on or leading it. They relied on history and past success to carry them forward, and fell behind on vision, while those with no baggage from technology or tradition have been thrust to the forefront.

So what does this wave of fintech bring that makes it looks so new, and how can financial institutions capitalize on it? A recent research-based report released by The The Economist Intelligence Unit (EIU), "Symbiosis: Your bank has your trust. Can fintech make you love it?", digs into the possibilities of the relationship between fintech startups, and traditional financial institutions, in the years leading up to 2020. As part of their research, they surveyed 200 senior retail banking executives from around the globe about over-arching concerns such as regulation, security and technology, and how they are responding. But at the heart of it all, whether you are a fintech or finserv organization, what we find is the same thing the industry has always focused on: the needs and concerns of consumers.

A look ahead: Trends expected to have the largest impact

No surprise, regulations and cyber security come in as a key concern across the industry, but especially in the U.S. While cyber security will probably always be a concern, with new attacks like the recent WannaCry ransomware constantly emerging, the U.S. apprehension regarding regulations can be attributed to a few key factors: the controversy surrounding the role of the CFPB; the uncertainty in the country with government leadership switching parties, and all of the effects such a change entails; as well as the ongoing developments in policy regardless of the election. Meanwhile, Canada continues to maintain a stable economy by instilling high expectations for its financial services organizations. Regardless of the country though, what we ultimately see are regulations being published and enforced, driven by the desire to protect consumers. What will be interesting to see over the years leading up to 2020 as the industry equalizes, is how fintechs start to be regulated.

What is the biggest challenge your bank faces concerning data?If you jump to Chart 6 in the report (also referenced here), you'll see the consumer-centric mindset surface again. The biggest challenges banks cite with regards to data are surrounding data protection, privacy regulation and security. While these are global figures, they are reflective of the atmosphere in the region as well.

At first it may seem that banks and other financial organizations seem more overwhelmed by the perils of data, rather than focused on the positives of the insight that data can bring. However, another trend we are seeing rise is an awareness that those insights are valuable and need to be a priority in the long-run. As they look to leave their legacy technology behind, banks also look for 360-degree insight into the customer relationship and actionable business intelligence that can be used to drive organizational strategy.

The new wave: Competition and new entrants in North America

Perhaps the realization that fintech is not really new is hitting the industry, as The EIU's research found that fear of fintech has markedly diminished in the United States, down to only 2%. These new fintech startups are being folded in with the rest of the industry as we come into a state of equalization. This also means that now, more than ever, banks and fintechs must work together and come to a state of mutual existence and prosperity in order to prepare for the next wave.

Which non-traditional entrants to the retail Banking industry will be your company's biggest compitition in the years up to 2020? While payments disruptors are expected to be the largest competitor, the positive side is that this is a low value business where fees have made it difficult for banks and credit unions to make a profit. The downside is that these fintech startups could potentially use this relationship as a gateway to expand their walletshare, cutting into the relationships that financial institutions have been cultivating for years.

Financial institutions need to evaluate what their operating model is going to be going forward. Are they going to partner with these payments providers to bridge the gap and circumvent fees, like those who have partnered with Apple Pay? Or are they going to create a strategic initiative to apply the principles that fintechs are doing well, and revamp their business?

Open banking and API – The next wave?

Thus far, open banking is not a requirement in the U.S. and Canada, as far as external influences, but that doesn't make it any less of a necessity. With all of the concerns around data and security, the term Open Banking as connoted by PSD2 doesn't really resonate in the region, but once you start talking about open API, you discover that actually open banking is viewed as a "must".

Consumers want flexibility and access to a wide variety of services, and sometimes the only way that vendors and financial institutions can provide that is to integrate with outside offerings. Not only does this interface provide the desired services, it often saves time, money and other resources. The difference between Europe's Open Banking and the North American interest in open APIs is that these institutions are maintaining control over their data. This also means that competitors don't have access to the data of financial institution's account holders – in fact open APIs make financial institutions more competitive instead of less.

Though created with a different goal, by continuing to integrate across open APIs, soon the region will have its own Open Banking network, driven solely by consumer requirements (as opposed to the regulations being imposed in Europe).

Once all is said and done, the main focus of this report, of the industry, and of the way that we work together, is the fulfillment of the needs of customers. We may be in period of equalization now, but financial institutions need to prepare for the next wave before it hits – whether that means partnering with fintechs or learning from them. 

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