Digital Transformation in Banking—The Elephant vs. The School of Piranha

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I’ve been working in and around banking for more than two decades. Banking is, of course, not immune from the wrenching changes driven by the relentless advancement of technology. Let’s look at what banks face today through an analogy. An elephant (which represents the bank in this analogy) finds itself crossing a river full of piranhas (which are the FinTech startups). The piranhas start to nibble away at the elephant. The elephant is hefty and even a large school of piranha will take a long time to eat an elephant. But, eventually they will succeed if the elephant does not take any action.

So what are the elephant’s options?

  • The elephant can freeze, just stand there and wait for the inevitable
  • The elephant can haul himself out of the water to safety
  • The elephant can go on the attack and stamp on some of the piranha
  • The elephant can eat some of the piranha

Now consider the piranha in terms of FinTech. There’s a lot of them but, not enough to eat the elephant all by themselves. But as a group, they can eat enough of the elephant to weaken and kill it. In fact, it has already been happening. Here are some examples of how FinTechs are eating away at and weakening banks:

Funds transfer piranha = Xoom

A funds transfer company that started a few years ago and disrupted the international wire transfer market by offering funds transfers for $4.99 compared to the typical $35 for a wire transfer initiated through a retail bank.

Personal lending piranha: Lending Club

A personal loan crowdfunding service that allows multiple investors to invest a small piece in funding a personal loan application took a bite out of the bank’s personal loan market.

Mortgage piranha: Rocket Mortgage App

A mobile app that allows mortgage borrowers to apply for and secure a mortgage from Quicken Loans using a smartphone-based application. Quicken has taken big chunks out of the bank’s previous monopoly on mortgage lending.

Commercial lending piranha: Kickstarter

A crowdfunded small business and startup funding service that allows a large variety of startups and business to raise money for most commercial purposes and mostly with electronic loan documentation.

Payment processing piranha: PayPal

Although PayPal is now a behemoth, it did define and disrupt the peer-to-peer payments market that allowed individuals to exchange payments which was a capability that banks couldn’t offer at the time but have since copied (e.g. Chase Quickpay)

Investment advice and management piranha: Mint

FinTech players like Mint have disrupted the investment and money management market where banks and wealth management giants have dominated, making money from commissions and management fees in the process.

Of course, none of these FinTech players on their own can do enough damage to a major bank to bring it down as they only chip away at the portfolio of products and services offered by a full service bank. However, if enough FinTech players chip away at enough of the banks’ services then they can present a structural risk to the bank’s future.

How can banks prevent piranha attacks?

Banks needs to realize they are not without options and can and (in some cases, already do) employ a variety of tactics to preserve their markets. For example:

  • PayPal acquired Xoom and essentially took it off the market as a direct competitor
  • , all introduced no-fee peer-to-peer funds transfer services to compete with Paypal
  • Banks are streamlining and improving their competing services to stay relevant and cost effective to their customers
  • Banks have co-opted major technology players such as Amazon and eBay by operating branded credit card programs for them thus expanding their reach indirectly
  • Banks have assets that startups don’t have such as vast stores of data on their customers, their customers’ financial habits and the products and services they use
  • Banks have vast amounts of capital to employ and can co-opt, fund and in some cases acquire FinTech companies to take them out of contention

It’s not as easy to completely disrupt an industry such as banking like Amazon has done with retail and Spirit and Ryanair have done with airlines. It’s a highly regulated business with deep pockets, strong lobby power and almost as important, vast treasure troves of data on their customers’ financial habits that just isn’t available to independent FinTech upstarts.

However, the elephant standing still in the river while the piranhas slowly render it down isn’t an option. Digital transformation will be an essential part of the bank’s defense mechanism. The only variables are how much is required and how long will it take in order to fend off potentially fatal competition from FinTech?

Alarmist speculation you say? Consider this:

If you had asked the CEO of PanAm in 1990 or TWA in 2000 about threats to their business models they would have said “Don’t tell me how to run an airline, kid!” PanAm went bust in 1991 and TWA in 2001. Meanwhile they have been replaced by more efficient and cheaper upstarts like JetBlue, Spirit, and RyanAir.

If you had asked the Lehman Brothers CEO about risks to his bank on September 14th, 2008 he would have said “There’s nothing you can tell me about running an investment bank.” Lehman went bust almost overnight on September 15th, 2008.

Lotus Software almost single handedly defined the desktop application market with Lotus 1-2-3 but failed to anticipate the growth in MS Windows and their product was overtaken by MS Excel in short order. Lotus sold itself to IBM in 1998 and now their brand is a backwater in IBM’s huge product portfolio.

Oldsmobile and Pontiac made old fashioned and mediocre quality cars for many years before their money losing brands were killed off by their parent company General Motors.

It’s as true for banking as for any other industry, stay relevant, exploit digital transformation, and always keep one eye on your rearview mirror because you never know who is going to sneak up behind you and eat your lunch!

For more information about how TIBCO is helping banks digitally transform, please visit our banking page.