Financial technology, or ‘fintech’ and its effects on the banking industry became a hot topic just a few years ago. However, disruptive technology making financial services more convenient is something many experienced professionals in the industry are familiar with. Over the last four decades Anil Chaturvedi has built an exceptionally successful career in banking across three continents and has seen the industry transform dramatically. His experience and insight puts the recent fintech trend in context and can also offer fresh graduates to the industry some valuable perspective.
When Anil Chaturvedi, Managing Director at Hinduja Bank started his career at the State Bank of India in the early 70’s, banks were also trying to improve services for their customers with technology. It was banks that introduced credit cards in the 1950s and banks who leveraged the internet when it became widespread in the 1990s to enable online banking.
As an industry veteran, with experience developing business for large banks in India, Switzerland, and the United States, Anil Chaturvedi has unique insight into this disruption. Fintech startups like Kabbage, Stripe, and Sofi (among others) have launched what seems like a huge attack on the banking industry. However, in this article, Mr. Chaturvedi helps us sort through what’s really happening by going beyond the headlines.
His expertise allows us to outline what effect fintech has had on the banking industry so far, helps us clarify where large banks are vulnerable and highlights the challenges that startups must work through in order to make their offerings fit for purpose.
Not So Disruptive
According to Google Trends in late 2017, the fintech discussion reached its peak. Much of the discussion surrounding fintech was related to how the new crop of competitors would affect the banking industry and the popular narrative was that large and established banks would be undone by more agile, consumer-focused startups. However, while many financial technology startups have seen plenty of success, this hasn’t come at a huge cost for industry leaders. In contrast, many of the banks that Anil Chaturvedi helped build in the early 70s and 80s, are still alive and well. The difference is that many are now working in partnership with these fintech start-ups, rather than working against them.
How Are Startups Affecting the Banking Industry?
It’d be foolish to suggest that startups haven’t had any effect on the banking industry and Anil Chaturvedi explains that fintech’s most significant gains have been made in retail banking. More specifically, in payment processing and making loans. In fact, in a sample of 350 fintech startups, it was found that more than half focus on products and customers in the retail banking sector.
But how are startups doing this?
It’s a combination of three things: improving user experience, financial incentives and clever branding. Chaturvedi explains it’s a successful strategy because fintech startups are well-positioned to capitalize on three things: User Experience, Branding and Pricing
Since fintech startups aren’t as large as an established bank, they can focus all their attention on one small area, like user experience. This is a huge advantage when you’re trying to change an industry. While bankers like Anil Chaturvedi have huge pools of resources to draw from compared to startups, they can’t be quite as nimble in responding to customer expectations. Plus, whether it’s justified or not, the financial crisis eroded trust for many banking customers, which makes a differentiated branding strategy a competitive advantage for fintechs.
Finally, fintechs also don’t have nearly the same overhead that a large bank has, so they’re able to compete very effectively on price. This is especially true, Chaturvedi says, in a post-recession world in which regulatory oversight has increased costs substantially for banks across the globe.
The fact that Citigroup has a compliance division with a staff of 30,000 is demonstrative of the fact that large banking institutions face regulatory oversight and restrictions on certain types of loans that fintech startups do not.
Because in some cases fintech lenders aren’t technically ‘banks’ they are under less scrutiny and are able to offer interesting financing alternatives.
Having observed these three factors, it should come as no surprise then that retail banking sits at the forefront of the battle between established banks and fintech startups. Only in retail banking, which is heavily consumer-focused, can fintech startups leverage their three main competitive advantages: pricing, branding, and user experience.
Still, questions remain as to how fintech will affect commercial or corporate banking. While banks still have many of the same disadvantages of increased compliance requirement in the commercial banking space, the advantages that fintech startups hold in the commercial space are not as strong. For fintechs to muscle their way into an industry that’s been established for centuries, they’re going to have to figure out more than branding, user experience, and pricing on consumer loans.
Banks’ Big Advantages
Obviously, established banks have resources and manpower that dwarf the resources of even the most well-heeled financial startup. But financial might is not a bank’s only advantage. A big component of bank’s ability to outcompete startups is evident in the back-end of financial services. While startups have been able to dress up the front-end of their apps, creating beautiful and convenient experiences for their customers, they haven’t been as successful at recreating the infrastructure and back-end systems of establish financial services providers.
Bulge bracket banks, like those Anil Chaturvedi has lead throughout his career, use secure and stress-tested infrastructure to transfer money, communicate and to clear payments. Even as fintech offers new and exciting financial services, these companies must piggy-back third party software, whether its a payment through PayPal or a loan that’s funded through Kabbage.
For startups, this is a big disadvantage because using the old infrastructure is costly and since startups are much smaller than banks, the costs of using this old infrastructure are even higher.
Of course, there are technologies that could change the way the back-end of finance works, but it’s not going to be easy for fintech startups to implement new technology in this space. For one, you’d be changing the way that established banks process and clear payments which would require agreement among many stakeholders. And, as a fintech, you’d have to deal with government regulators if you wanted to change the technology that’s used to support an entire financial system.
Where Will Banking Go?
If you had asked some commentators as recently as a few years ago, they likely predicted a much more precarious position for banks by this time. However, banks are still an extremely profitable business and are also benefiting from this new wave of financial technology.
The banking expert we contacted for this article, Anil Chaturvedi has seen dramatic transformations over his career and offers some sound perspectives on the future of the industry. Chaturvedi tells us, that by its very nature, disruption is unpredictable, so while we may not know exactly where banking will be in twenty years, we can say with near certainty that it will be vastly different than the way it is today.