This blog has originally been published at Holland Fintech.
During the last decade, banks have faced increasing pressure from fintech start-ups. New players are unbundling the bank’s value chain, with better products tailored to specific segments and more efficient organisational models.
Bank are trying to follow suit with large innovation departments, new ‘fintech strategies’ and a change in culture, including the start-up attire of a t-shirt and sneakers. But despite their sheer size and efforts, most banks seem to struggle.
We can compare the battle between banks and start-ups with the story of David and Goliath from the Old Testament. Goliath was a strong man, with full body armour, a spear and a sword. Seemingly no one could conquer this giant. Then there was David, a small shepherd boy without any protection. Assuming a traditional single close combat, no one would expect David to stand any chance.
However, David did not honour the traditional rules of warfare. By engaging in a different type of battle, he turned Goliath’s strength into his weakness. Goliath was a large and strong man, but his heavy armour made him slow and he had poor eyesight. David was not so strong nor well protected, but his lack of armour made him fast. More importantly, David was a skilled slinger. David ran up to Goliath, took a stone out of his bag, and slung it onto the forehead of Goliath. Thereby the underdog was able to win the battle. [source: David and Goliath, by Malcolm Gladwell]
What we can learn from this story is that people, or companies, have certain characteristics. Whether these characteristics are an advantage or disadvantage largely depends on the situation or ‘the rules of the game.’ Seemingly great characteristics can quickly become a disadvantage, and vice-versa.
The underlying principle is competitive advantage. This is a set of conditions that best suit a company’s characteristics and make it most efficient relative to others. By creating your own rules, or in business term your own market, you can alter the circumstances to best suit your characteristics.
Competitive advantage can be based around a variety of things including a product suite, customer segment, capabilities or themes. This principle holds not only in case of competition but also, or especially, in case of a partnership between companies.
To translate this to the world of fintech: start-ups have changed the rules of the game for banking. Banks are trying to follow the rules of the start-ups by trying to offer the same customer experience and efficient processes. But should they?
I certainly believe banks should respond by raising the bar, and continue their efforts to be more efficient and customer friendly. Due to technological advances and better services offered by tech companies, customers nowadays simply do have higher expectations on banking.
However, banks should have a good understanding of their competitive advantage, to stay close to their home environment that best leverages their characteristics. What makes the incumbent bank different from start-ups?
First of all, the fact that fintech start-ups typically target one specific niche is the very point that sets banks apart. Banks are typically one-stop shops for people’s finances, offering a large variety of products and services. Banks are typically also the first contact point for people’s finances and still enjoy a high level of trust when it comes to financial services. They could leverage its primary customer relationship to become the spin in the web, for example through partnerships with alternative lending providers.
Second, most banks have large physical distribution networks. This offers customers a multi-channel customer experience with the option to walk into a branch and talk to an advisor – something that is still valued by large segments of the population. Plus, these branches enhance the branding of the bank. This allows banks to distinguish themselves in the digital world, with a more human, personal touch.
Third, in contrast to start-ups that must build a new company from scratch, banks have large existing organisations, with many customers and existing business that provide diverse sources of income. Due to the low churn rates, banks are likely to maintain their foundation in the foreseeable future. This gives banks a strong platform to experiment with a variety of initiatives to diversify their business risk.
There are many other unique characteristics of bank, for example banks have large balance sheets, strong risk management functions and regulatory compliance in place with extensive KYC.
While these characteristics are generic to all banks, every company is unique and has its own competitive advantage. Ask yourself what sets you apart from the rest. Why are customers choosing you? In which areas do you perform better than the benchmark? Then, instead of following the ‘rules of others,’ you can create your own ‘rules’, to position yourself in the market to best leverage your characteristics.