Originally published pyments.com

July 24, 2019

Shoring Up FIs ‘Deteriorating Advantage’ Over Big Tech

Conventional wisdom seems to hold that challenger banks will eat traditional financial institutions’ collective lunch in the race for deposits, for checking, even for credit cards.

In that mindset, banks, laden with entrenched legacy systems, with disparate platforms — call it big infrastructure! — and less than seamless online presence are at an inherent disadvantage when it comes to catering to the needs and desires of an ever-younger population used to technology.

Alternatively, another line of thinking holds that tech firms need a bit of the know-how and the installed base that banks have built up over … well, centuries. Banks need to get smarter about tech, and tech needs to get smarter about banking.

As Karen Webster observed in a PYMNTS interview with Zac Cohen, general manager of Trulioo, the lines blur, with roles as competitor and collaborator melting away and — perhaps for banks, and for Big Tech, giving rise for inspiration to do better?

Maybe all of the above, and maybe all at once.

Done well, said Cohen, at the bottom of it all lies a significant revenue opportunity for Big Tech — and for traditional financial players, too. Turns out there is room for all stakeholders to learn from one another.

For traditional financial institutions (FIs), he observed, “In recent years, more generally the challenge has been dealing with the agility of Big Tech.”

That agility is in evidence with the speed at which tech-focused players bring new products and services to market, said Cohen.

Big Tech is good at promoting, designing and improving the user experience, he said. That’s especially a challenge for legacy FIs as digital transactions and the online economy continue to take root.

But legacy FIs, he said, do have a significant weapon at hand.

As Cohen explained, “They have established trust and history, which means their distribution channels are well established. They can take advantage of those relationships. We’ve all come to the realization of how powerful technology can be. I think this is just another layer of motivation and opportunity for legacy FIs to fulfill their own digital transformation agendas, take them seriously and make it happen.”

Open Banking

One spur toward digital innovation, for collaboration and cross-pollination for FIs, comes via open banking. The financial services ecosystem is changing, and is changing, where the collaboration between incumbents and tech-nimble upstarts is being structured by regulatory fiat.

Cohen said financial institutions are being prodded by competition from tech firms to innovate more quickly, to have their pulse on what consumers want. Now, with open banking, the FIs are getting a push from regulators to standardize their competitive walls and protections when it comes to user history and information.

“They’re no longer going to be able to hide behind that paywall so to speak,” said Cohen. As a result: Innovation must be part of the strategy as FIs adapt to a new regulatory landscape.

There are nuances to consider.

As Cohen told Webster, financial institutions are where consumers deposit their paychecks, where they link debit cards. The continuum of use spans putting money into checking accounts, linking that checking account to a debit card and spending funds as they accrue — and the process is a circular one, constantly refreshed. Call it the paycheck test.

FIs may be nonchalant about embracing technology wholeheartedly, perhaps falsely lulled by the enormity of their reach into financial life.

“It’s because they’ve been trusted for such a long time with not only people’s personal finances but in many ways the economy overall as well,” said Cohen.

Time may be of the essence in bringing those entrenched services to the digital realm.

Trust in Digital Banking

“It’s critical to see trust in digital banking,” he said. Legacy FIs have built trust in their traditional models because up until very recently banking has been a face-to-face situation. The trust represents a “deteriorating asset,” he said.

That’s because on the opposite side of the spectrum, Big Tech has become embedded into a much broader range of expectations and interactions in life — and here, familiarity breeds trust.

“The first thing we do in the morning and the last thing we do at night is interact with ‘Big Tech’ services,” he said. “It’s a tightening race between who historically has had that trust and who today is more embedded in the interactions of the general consumer — which naturally brings about reliance and confidence through everyday usage and derived value.”

The fact that FIs’ trust factor is a deteriorating asset can be seen in the findings of a recent PYMNTS study, where consumers indicated they would be open to considering financial services from trusted online companies such as Amazon.

As Cohen pointed out, “How long will it be before you interact more and more with different online services — and you keep seeing friction with incumbents — before you jump ship, fully?”

What Big Tech Needs to Do

To get the trust that legacy firms enjoy in the financial area, to get paychecks deposited into digital wallets, Cohen said Big Tech has to ensure consumers that their information and assets are being kept secure and private. Of his own firm, he said, Trulioo advises corporate clients eyeing digital banking that each use case and customer is unique — and even digital identities shift.

“Identity really is a mosaic,” he said. “It is often changing and is not consistent from market to market or country to country. We advise all our clients and customers to select technologies that are purpose-built to suit a changing landscape, one that values security and privacy at the forefront.”

For now, the incumbents have trust in the services they deliver. The digital players have great UX, which engenders trust in the interaction. Each side needs the others’ assets.

Build or buy? Depends on the situation, said Cohen, who notes that competition may not be a zero-sum game. Partnership models can also be the answer, he added, where combined efforts play off of incumbent or upstarts’ strengths.

“You have to be learning from everybody and then make what you learn your own — for your own customers and your own strategy,” he said. “It’s just all about who can get there faster and who’s taking advantage of the technology and tools available in the market to help get you there.”