Open X works by connecting APIs between brands and products. Source: Shutterstock

Traditional banks and fintechs must rethink relationship and embrace Open X

  • Traditional banks are failing to innovate quickly enough – they could lose customers quickly if things don’t improve
  • Incumbents and fintechs must overcome frustrations for mutually beneficial collaborations

“The gap between what customers expect and what traditional banks currently deliver has never been wider, but now is the right time for banks to catch up from front to back-end to offer the best customer experience.”

That’s one of the key messages delivered in the World Fintech Report 2020 by Capgemini, which urges a rethink of the execution of collaborations between incumbent finance players and the new up-and-coming players, both of which stand to benefit from collaboration.

The established banking sector, while largely shifting online and investing heavily in front-end IT infrastructure, is now competing with customers increasing expectations for “data-fueled, hyper-personalized experiences in real-time,” which incumbents in other sectors have been quicker to adapt to.

This is leading to a  “widening gulf” between what Big Tech and challenger banks are offering consumers, and the services on the market by traditional players.

While overall investment in new IT increased from 24 percent in 2016 to 33 percent 2019, middle- and back-end operations are often still based on complex, manual business processes, leading to a fragmented customer experience.

As a result, 40 percent of tech-savvy or Gen Z customers are ready to leave their current bank within the next year due to a dissatisfaction with the service they’re getting – this hints at a potentially huge exodus of accounts if leading banks fail to act.

In order to remain attractive and competitive then, they must shift to becoming customer-centric and inventive, says CapGemini.

But that doesn’t mean they have or should go it alone. Challengers and fintechs – across banking and lending, payments and transfers, and investment management – are in many cases struggling to scale operations.

Collaboration between new startups and traditional institutions isn’t new in the sector but, so far, the two sides have been frustrated by results. According to the report, just 21 percent of banks say their systems are agile enough for collaboration, and just 6 percent have achieved the desired ROI from partnerships.

On the other hand, 70 percent of fintech disruptors (unsurprisingly) don’t see eye-to-eye with their bank partner’s culture or organization, and the same amount are frustrated by process barriers.

Those previous hurdles, however, should not see the finance industry give up on the potential benefits of collaboration. It will take a significant rethink, according to Anirban Bose, CEO of Capgemini’s Financial Services and Member of the Group Executive Board, but the time to do it is now, or perhaps not at all.

“The world has changed dramatically over the last couple of months. Businesses will evolve and emerge from the COVID-19 crisis in different and profound ways,” said Bose. “For traditional banks, this will translate into an even greater need for digital experience through further collaboration with FinTechs.”

Bose continued: “Since we began this report three years ago, FinTechs have moved from disruptors to mature players, and it is now essential for incumbent banks to consider them not only as formidable competitors, but as necessary partners of choice to meet changing consumer expectations.

“Effective collaboration requires people, business, and process maturity.

“While, for traditional banks, failure is not an option, FinTechs are fast to market yet ready to fail. Inventive banks with the willingness and capabilities to collaborate at scale and industrialise innovation are most likely to prosper within the shared Open X ecosystem.”

While Open Banking is primarily focused on the sharing of financial data between the banking ecosystem, Open X is a more structured form of collaboration made possible by Application Program Interface (API) standardization, and shared insights from customer data as well.

Meanwhile, the report suggests banks should take on more specialist roles within this new ecosystem, such as a supplier or aggregator, rather than attempt to fill a universal one.

According to CapGemini’s Open X Readiness Index, banks already leading in a revitalized approach to collaboration are those who have designated a dedicated and autonomous start-partnership team and who “demonstrate a fail-fast innovation approach” to determine value and cut losses quickly.

Frontrunners will also invest in emerging technologies and have little dependency on legacy systems, making FinTech integration easier.

The results of effective Open X collaboration can include improved top- and bottom-line growth, better productivity, enhanced customer engagement, reduced costs, increased transparency, and boosted employee satisfaction.

“Traditional banks are at a critical juncture. They must embrace Open X or risk becoming irrelevant,” said John Berry, CEO of Efma.

“In order to keep up with ever-changing customer expectations in today’s marketplace, incumbent banks must transform into Inventive Banks with collaborative support from qualified FinTech partners.”