While aesthetically pleasing, the distinctive V-shaped flying formation of migrating Canadian Geese is actually an efficiency measure. By flying in formation, the flock can be more aerodynamic and fly about 70 percent farther with the same amount of energy than if each goose flew alone. The thrust of one helps the others. With common direction and cooperation, they get to where they are going faster, easier and more efficiently.
It’s a concept that banks and financial technology (fintech) companies should—and are—quickly learning.
Five years ago, industry watchers forecasted fintech to be the imminent and dramatic demise of traditional banking. It hasn’t happened, and in most geographies, the impact is being downgraded from a revolution to an evolution. Rather than displacing the incumbents, fintechs are acting as a stimulus for incumbents to raise their game and develop better customer experiences—often in partnership with fintechs. The exceptions are markets where there were no incumbents. In China, the success of Ant Financial and Tencent is being driven at least to some degree by the lack of inertia in the banking system, and that digital technology has enabled a truly new experience rather than just a better alternative.
The picture is quite different in most mature markets. Volume migration from traditional to pure digital players continues to be in the low single digits in the US, while funding and regulatory hurdles are impeding challenger banks in the UK. Outside of a very few exceptions, like London-based TransferWise, no real killer apps that actually change the economics of banking have emerged in such markets, and many of those that show promise have been bought by incumbent banks. Reality is setting in that no matter how slick and well designed the customer experience is, conservative customers of incumbent banks need a more compelling reason to move their primary accounts.
Incumbent banks recognise that technology has the power to transform their business by making it more efficient, providing a better customer experience, and ultimately improving profit margins. Increasingly they are also recognising that flying in formation with smaller fintechs is more efficient than trying to always create their own solutions. By flying in formation, they can address the banking equivalent of air resistance like legacy system interfaces and regulatory compliance.
Likewise, fintechs are realising that flying alone can be energy sapping. In a rising rate environment in North America and Europe, some of operating cost advantages of fintechs are going to be offset by banks being able to keep their deposit costs rising slower than wholesale funding rates. As their cost advantage is eroded, fintechs may need to think about joining a banking formation to ensure that what they have that is distinctive and high value reaches the largest possible customer base. With the right partners, fintechs can explore new revenue streams, tap into different talent pools and access internal investment pools to evolve their products.
By combining their strengths under a common direction and in a strategic flying formation, banks and fintechs can deliver more compelling, hyper-relevant bank customer experiences quicker and easier than if both continue to fly alone.
To learn more, I invite you to read:
Our recent report: Fintech—Did someone cancel the revolution?
Our opinion editorial on Forbes: Happy together—Why banks and startups should collaborate on fintech