Digital-first is the mantra of the moment in commerce. Payments are being reconfigured and rewired, creating commerce ecosystems that move with consumers across channels. In a sense, the industry is witnessing a head-to-head matchup amid the scramble to digital-first on a crowded field.
Call it the financial services industry equivalent of Super Bowl LV – the Tom Brady/Patrick Mahomes matchup that we saw just a few weeks ago. But here, it’s big banks (the Bradys of the financial sphere) vs. FinTechs/Big Techs (Patrick Mahomes).
Kelly Switt, head of financial services at Red Hat, and Mick Fennell, head of payments at Temenos, told PYMNTS’ Karen Webster that if the banks want to keep manning the digital front doors, so to speak, they have to think a bit like a sports team: Focus on coordinated plays, run the length of the field and protect the star quarterback while racking up the points.
Those analogies aside, the more important element is the urgency of a digital-first mindset. Consider the fact that PYMNTS found that 60 percent of those aged 31-42 – a key banking demographic in terms of income and spend – would be likely to open payment accounts with Amazon, Apple or Google if they were offered. Consumers, then, may not necessarily be thinking about the “brand” of payment as opposed to the activities in which they want to engage.
All of this shows that traditional banks must think differently about how to balance their role as the trusted and secure steward of their customers’ money. They need to evolve into dynamic and relevant players on their digital payments teams as customers examine how – and with whom – they transact. In the meantime, the challenges of this digital shift are firmly rooted, especially when it comes to infrastructure at the big banks. Banks have to grapple with legacy systems and technologies that have been cobbled together over decades.
At a high level, said Switt, “when you look at the traditional banks, there is an obvious need for very large-scale modernization. But at the same time, what they’ve always been known for are those safety, security and trust aspects.” Wholesale tech overhauls, she said, are not in the cards. Banks run the risk of missteps, perhaps opening up risk or jeopardizing the consumer experience and denting their own reputations in the process. On the march to digitization and beyond, then, it takes a village – and it takes an ecosystem to process a payment.
Creation and Distribution – and Bridge Building
Banks have some inherent advantages in the race toward the digital realm. They’ve been creating financial products and services for decades, and have the means of enabling innovation through distribution. Think, then, of the way most markets are constructed regardless of vertical, contended Fennell, with manufacturers and distributors working together to reach end consumers.
“When we talk about someone like Amazon, they don’t manufacture the products that find their way into all those warehouses, they’re not building all those products,” Fennell told the panel. “People put their products into their warehouses to be distributed … that is one of the key things banks need to think about: How do they create products that will be distributed from these ‘warehouses?'”
They may have their own channels and their own front ends, but these same FIs need to think about how they package up their services – not just payments products. “It’s about the bank being at the core, existing as a factory generating products that they can distribute, but also are enabled for distribution with … digital players and FinTechs,” said Fennell.
Distribution requires a bit of bridge-building between points A and B. Fennell noted that “there are a lot of layers to the bridge,” which is built on technology (such as the cloud) and data/messaging standards such as APIs and ISO 20022. “On one level, there’s a layer of technology that needs to be there. Now on top of that, you have to talk about scalability because the amount of information is increasing,” said Fennell.
“When you are thinking of that bridge and engaging with the consumer and engaging with distributors,” he said of the banks, “it’s important to think through the whole stack of your data standards, your communication standards, your processing capabilities, your infrastructure. The other thing that comes into play is the actual security of transporting that data and ensuring data integrity as you’re putting it across the bridge.”
The Teamwork Approach
The competitive lines are blurring a bit, setting the stage for some teamwork. FinTechs won’t have the scale or experience of working in a highly regulated environment to provide that full, end-to-end, safe consumer journey. As Switt pointed out, because the FinTechs are focused a bit more narrowly than their traditional FI counterparts and haven’t had to deal with the security standards that regulatory bodies have put into place, they can struggle with scale. Working with big banks can help FinTechs capture scale and grow market share. As they forge partnerships with FinTechs, said Switt, banks need to shift the way they think about investing in themselves – and the returns on those investments.
“They have to invest in their health before they can really help others,” she noted.
That means not thinking solely about P&L statements, unit by unit (banks have several segments, after all), and more about returns on capital dollars spent. FinTechs typically have fewer P&Ls and tend to focus on problem-solving.
As Fennell noted: “For a lot of the FinTechs, it’s about gaining market share … they have big checkbooks, but they also have vision.”
For banks, said Switt, tech investment must be an operating (and ongoing) expense rather than simply a capital expense.
What Big Tech Wants – and What Banks Need to Do
With a nod to what the Big Tech players want as they craft their own banking/banking as a service strategy is simple, said Switt: They want the data that comes along with payments, which reveals much about how individuals behave as customers. Big banks must start thinking about how they can keep secure grips on their data and data management. That means they have to think differently about their technology choices, said Switt, and bring various business units within the FI more closely together.
In crafting an action plan, Switt said banks need “to think about being vulnerable and honest, internally and externally, about where they are trying to go and how they get there.” They will need to approach partnerships in a different way than they had done traditionally, with a focus on the end customer and on driving value for the user (and on FinTechs in need of risk and compliance expertise). “It’s about the banks having that API infrastructure and openness so they can quickly and easily onboard these FinTechs,” said Fennell.
The Super Bowl analogy is apt here, then — Tom Brady, great as he is, inevitably faces the sunset of a stellar career. And so it is with the banks’ legacy systems and “core quarterback” functions. As Fennell noted, “when Tom Brady does go, everyone has to have a plan – and there is no sense in putting that plan into place in two years’ time.”