Strategies for Banks: How to Disrupt and Coexist, by Pery Venkat

With the explosion of financial technology (fintech) innovation, it’s becoming critical for banking giants to focus on a dual mandate: run their banks more efficiently, while transforming to appeal to the millennial generation and beyond.

But how should they approach this? How much should they focus on neutralizing disruptors, and how much on copying them? After all, some disruptors will be flashes in the pan, but many others will gain critical mass and truly threaten meaningful chunks of the banking industry. How should banks respond to these potential threats?

Be aware of your opponents’ strategies

We are seeing disruptors using three top strategies in the marketplace:

  1. Fintech startups are moving aggressively to dominate specialized markets. Startups like Lending Club and Square are growing into billion-dollar businesses overnight, and they have the potential to become mini-banks in their specialized areas within the next five years. These new companies are attempting to scale their core businesses with other diversified offerings. Venmo, for example, is a free digital wallet that has opened the door to merchants to use their credit facilities.
  2. Consolidation in the fintech space is motivating investors to merge, acquire, and partner. The peer-to-peer lender Prosper Marketplace acquired BillGuard, a spending- and credit-tracking app, for $30 million. Betterment, an automated investing platform, bought the savings-focused app ImpulseSave, making Betterment a viable candidate to be acquired in the robo-advisor space. For $150 million, Klarna, a Stockholm-based online-payments company, purchased Sofort, which provides Pan-European direct online payments.
  3. Full-service digital-only bank startups will emerge and provide similar services as traditional banks, only faster, cheaper and better. Their leading digital platforms and processes will be designed to use the latest technologies, elevate customer expectations, and address regulatory requirements. These digital banks will have no physical branches. In order to lure the millennial generation, they will deliver enhanced personal customer experiences both online and through mobile apps.

Strategy 1: Throw Out A Life Preserver

Although most startups in the financial market are securing seed investments from private equity players, some are struggling to scale, let alone meet the demands of their consumers nor investors. Banks should seize this opportunity and acquire a fintech startup that best aligns or diversifies their portfolio of services. Why?

Two simple reasons. The ones that struggle have low valuations (though of course, be sure that the underlying technology is sound!). And, startups are typically digitally-ready. This will allow banks to secure leaner investments while they jump start their capabilities to focus on strategies that elevate the customer experience and provide the convenience of banking on-the-go that millennials love.

Strategy 2: Partner

Banks should explore opportunities to coexist with fintech startups. Are there ideas to collaborate that allow the institutions to run more efficiently while transform digitally to appeal to the millennials?

One idea is to work together to create a marketplace that elevates the consumer banking experience…a one-stop shop of sorts. One platform, one interface, one single sign-on that delivers every banking need available across the ecosystem. And, the marketplace is accessible anytime online at the touch of your fingertips.

The banks could then prioritize their efforts on reinventing the user experience, the interface, the business model, and fintech could offer up their digital infrastructure. Although, both players would share in the risk, the opportunity for the banks could accelerate the adoption of digital capabilities, while the fintech could gain greater market acceptance.

Collaboration could enable both organizations to streamline their business processes considerably and run more cost efficiently.

One unexplored area is Bitcoin. Bitcoin and other cryptocurrencies like Dash and Zerocash, have yet to establish themselves as a common medium of exchange. Although they have become decentralized digital natives, they offer advantages in online transaction overhead and reliability that traditional fiat currencies cannot. Companies such as Blockchain and Coinbase offer mobile apps to provide customers with simple means to pay with bitcoin nearly anywhere. Coinbase recently introduced the first U.S.-based bitcoin debit card.

The Economist wrote a recent article that explains the difference between bitcoin and blockchain. The article argues that bitcoin’s underlying blockchain technology, not the currency, has the potential to transform and change lives.

Three Moves to Make

How should banks respond to these potential threats? First, realize and acknowledge that disruption is real. It may not be a direct threat to everything your bank does, but it can certainly eat away at higher-margin business.

Next, even if you can’t do exactly what the disruptors are doing, start incorporating some of their concepts into your business model and service offerings.

Further, explore whether to compete head-on with disruptors to protect high-margin business or to find ways to work with them. Bankers have become familiar faces in Silicon Valley and other tech centers, exploring investment and partnership opportunities. Some are creating their own startup-like cultures within key business units, such as the recent inauguration of Wells Fargo’s Digital Innovation Lab, Standard Bank’s PlayRoom Innovation Centre, or Citi’s Innovation Lab.

While financial institutions are facing significant disruption from digital startups, as we have seen, these challenges also offer real opportunities. Expanding into radically different online marketplaces will be difficult, and some ideas that seem promising will eventually fizzle out. But banks that start embracing good developments in fintech now will find that they are well positioned for the digital future.

What’s your view, should banks: be like a disruptor, pounce and merge or coexist? Let me know at Pery Venkat.

Opinions expressed in this blog are of the author and may not represent Cognizant’s point of view.

Pery Venkat

Venkat has 17 years of experience in the IT industry and is a Senior Director managing Cognizant’s business strategy, digital, M&A and…

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Originally published at on December 31, 2015.