McKinsey forecasts that it will be in banks’ best interest to open up. Image: Shutterstock
A new report from McKinsey & Company suggests that the most effective way for fintech to disrupt banking is not to disrupt it at all. Like several other experts in the field, McKinsey has come to the conclusion that cooperation with those who might become competition or “coopetition” offers more advantages.
Despite two years’ worth of news cycle warning banks that their days may be numbered, thanks to the disintermediation of their services by new fintech players, banks remain important, though threatened. McKinsey argues that while fintech is busy unbundling banking services for consumer ease, banks have only become more necessary as underlying infrastructure for service providers.
The popular example is PayPal; the payments processor that made web payments and peer-to-peer payments accessible and convenient for the first time. However, as McKinsey points out, PayPal and other companies like it add layers to the top of the financial services stack while taking part in “coopetition” with the underlying banking system. Simply put: PayPal’s merchant acquirer is Wells Fargo. Without banks, there is no PayPal. Or Square. Or Venmo.
The irreplaceable status of banks does not, however, exempt them from having to upgrade their antiquated systems. Fintech solutions to consumer problems thrive because banks’ slow tech adoption process leaves end users frustrated. McKinsey identified “six markers of success” that fintech can offer banks to improve customer experience and meet increasing demand:
- Banks can begin the process of fintech adoption by building comprehensive data ecosystems. Financial institutions have access to large amounts of customer data. Fintech can help banks aggregate and analyze their customer data to create stickier offerings.
- Using this data, fintech can help banks create a well-designed, segmented, and integrated customer experience, rather than use one-size-fits-all distribution.
- Banks now compete with nonbanks to provide savings, loan, and investment services. Much of the success of nonbank brands in these spaces can be attributed to a friendlier user experience and new brands’ employment of digital marketing; a tactic dear to the hearts of the coveted millennial customer. If banks adopted players like Mint or Wealthfront, they could combine the reputation of legacy finance with the agility and modernized offerings of the newcomers.
- With acquisition comes the opportunity to aggressively mitigate the potential cost advantage fintechs hold through radical simplification, process digitization, and streamlining of legacy systems and technology.
- Rather than spending time innovating from within and reinventing the wheel, banks can rapidly leverage and deploy this next generation of technologies.
- All of the above enables banks to rethink legacy organizational structures to support a mostly digital set of services and banking environment.
McKinsey makes a persuasive and nuanced argument in favor of collaboration. Ultimately, banks have more to offer their customers when they welcome new technology and keep up with the rest of the world with real-time and on-demand services. Fintech can benefit from the established position held by banks, enriched by careful regulatory compliance and centuries of consistency.
Fintech is knocking on the door; McKinsey advises banks that it’s time to open up.
This is a conclusion we at Ripple Insights could not agree with more.
Read the full report here.