By adaptive - October 17th, 2016

The future of digital banking holds great promise for consumer convenience, innovation, and growth opportunities for legacy institutions as well as startups.

     But like all great disruptive eras, this is a time of great uncertainty. And as Robert Gray lays out in this first of two installments, there are a number of major challenges facing industry executives such as improving user interfaces, security and risk management, and mobile data and behavioral analytics.
Players new and old are adapting new strategies to employ nascent technologies and forge alliances to meet consumers where they are and where they want to bank, which these days may be anywhere outside of a brick-and-mortar bank branch.
“I think there’s a change in focus from technology supporting process to technology driving the process,” asserts Neil O’Brien, director of digital banking at Santander.
He adds, “So this idea of looking at new technologies and saying, ‘Well how could we use this technology?’ Now, it’s ‘How could we build our process around this technology rather than use the technology to support a process that we have kind of already mapped out?’ So I think the technology has really become more of the driver in digital enablement.”
Brian Smyth, CTO, Emerging Payments, JPMorgan Chase concurs, saying that banks need to think “digital first” in terms of their customers. “We shouldn’t be looking at, ‘I need to acquire a customer and now let’s see what digital experiences they want to engage in, or I can bring them into.’ It should be digital first; and so to acquire my customer digitally and they just immerse themselves completely in that digital experience from day one.”
O’Brien and Smyth aren’t the only ones thinking along these lines, just check out the below graphic. Their peers agree that the continued move to mobile and improvement of that experience for customers headline a laundry list of tech-centric areas of focus for this year. 
That was a key finding from a recent survey of 320 financial industry professionals ahead of the Mobile Banking and Payments Conference held in September.
It is in these areas that all players, incumbents and startups alike, feel pressure to remain relevant and offer innovative but easy to use solutions for mobile banking.
In a spin on Mark Twain, tech may be like the weather, in which everyone talks about it, but unlike those summer rains or droughts, some firms are seizing the day and actually doing something about digital banking.
         One example of how the funds are being deployed: Santander USA has been working on a new mobile app concurrently with new functionality for future releases including push notifications for electronic payments, adding analytics, biometric security, and even cash flow management tools.
Banks & Fintechs: Friends, Foes, or Partners?
Many within the industry forecast an increase in the number of smaller and more nimble fintech firms partnering with their more established banking brethren. They each bring different traits to the table, the startup fintechs are tech natives with intuitive interfaces but they must build the trust and loyalty, not to mention assets and a customer base which high street banks have acquired over many years, even centuries in some cases.
Trustworthiness is a currency that even money can’t buy, but of course it doesn’t guarantee future returns, either. So staid institutions and even those that are moving more quickly to offer comprehensive mobile banking offerings realize they need to invest more resources into that consumer-facing part of their business.
“Banks need to have a strategy to address the shifting tides that are occurring in the industry within digital and within mobile payments,” asserts JPMorgan Chase’s Smyth. “They need to engage with technology players who are jumping into this space. And from there, executing and enhancing their customers’ experience within mobile payments.”
The Mobile Banking and Payments survey found the vast majority of those polled see an increase in the mobile and digital budget over the next two years, with some 40 percent of respondents expecting the outlay to rise by half or more of its current level during that period. It’s telling that so few see a decrease.
Moven claims to be the first mobile direct bank, opening accounts purely on a mobile phone and operating in what it calls “a pure, mobile direct way with basic banking services conducted via mobile in a mobile only channel.”
Alex Sion, Moven co-founder and president, says the company is partnering with banks to help institutions including TD Bank in Canada and Westpac in New Zealand, accelerate mobile strategies in their home markets.
Sion says 2016 means “getting real” for fintechs. “It doesn’t necessarily mean a path to dramatic scale or profitability, but it does mean articulating and showing a path for the viable business model so one where we know that either the unit economics on the customer base or the unit economics of the business, however it makes money, that there is a market demand for that and there is viability on that going forward.”
In other words, it's a reality check. This may lead some smaller firms to seek out strategic partnerships or even a round of M&A with established financial institutions snapping up smaller companies with fintech expertise.
From his perspective, Sion says that could help some of the legacy banks fill what he sees as a void for those institutions, “There are only a very rare few of the largest banks in the US that actually build and manage their own technology. Most of them are dependent upon core banking providers, system integrators. If we’re moving towards a future where banking is unrecognizable from a technology business then who is driving the future of banking? Is it going to be the banks themselves or is it going to be the technology provider that they are with.”
There is no shortage of candidates here. The most prevalent names include Alibaba, Apple, Google, or Facebook, but there are other data and infrastructure companies at work beneath the hood of mobile banking.
There are other compelling reasons for partners or acquisitions—costs and the regulatory climate, two areas with which legacy banks are well accustomed.
Santander’s O’Brien says, “We’re really at an inflection point. We have recently seen a number of startups trip with regulatory issues. As more regulatory scrutiny is put on fintech companies as they grow, what we will find is that the regulatory side of things, the risk management, hasn’t been done so well and many of these fintech companies will find they have problems scaling because they haven’t brought their risk management along at the same pace as they have their customer acquisition.”
The executive says that should venture capital funding dry up or investors seek an exit, he sees banks buying “very interesting fintech technology at fire sale prices.” Of course only time will tell if he’s talking his book.
Part two of this report will be published in the October 31st newsletter.
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