Merchant Innovation

DATA: How FI’s Innovation Gap Is Big Tech’s Big Opportunity

FinTech banking competition

If we had to pick a favorite highly quoted Jeff Bezos aphorism, “your margin is my opportunity” would almost certainly be a contender for the top spot.  The “almost “is simply because it is not clear that it is even a legitimate quote. Like many famously quotable people, a lot of things are attributed to Amazon’s founder and CEO that he may not have ever actually said.

This may be one of those cases. Though it is often attributed to a shareholder letter, a quick look at every shareholder letter Bezos has written since 1997 reveals that’s not true. As far as we can tell, the origin of the quote is from a 2012 Fortune article, with the author writing:

A favorite Bezos aphorism is “Your margin is my opportunity.” 

A favorite aphorism that all research indicates came up for the first time in that article.

Sourcing aside, however, the “quote” has since caught on and been attributed to Bezos, usually in the context of explaining how Amazon has zeroed in on where its competitors make a profit to find ways to disrupt it – and them.

A trillion-dollar market cap later, it’s hard to argue Amazon’s effectiveness, quote attribution notwithstanding.

The same may turn out to be true in financial services, where margins and opportunities to disrupt them, are being challenged by a host of traditional players and nontraditional players alike. And it’s in an environment in which many financial institutions (FIs) may be less able to deflect the moves of more agile players.

“It’s really difficult – the banking ecosystem is not fast and that’s just reality,” Jim McCarthy, i2c’s new president and former innovation head for Visa, told Karen Webster in a recent conversation.

But reality is a complicated place, and the shift in consumer preferences around speed, customization, accessibility and flexibility are also a now a set condition on the ground around which financial services providers must adapt. For all the differences between finance and retail,  that same overriding consideration around providing a better experience around a better value is now pushing its way into consumer-facing financial services.

And while there are plenty of headwinds in pursuing those innovative opportunities – many so-called incumbent FIs may be running out of the proverbial runway. Big Tech, FinTech and neo-banks are increasingly there to lap up the opportunities innovation is presenting to offer an alternative path to financial services.

And according to the data — consumers are increasingly warming up to the idea of taking them up on that offer.

The Headwinds Creating The Innovations Gap 

When PYMNTS has interview players across the financial services ecosystem in terms of their innovation readiness, the clear takeaway around the ecosystem is consistent: The time for digital innovation was yesterday. But when we looked at what separates the top performers from the bottom performers, a pretty clear pattern emerges. The top of the lineup is varied in many ways, in terms of size, focus and core demographics served. But they all tend to have three things in common.

First up, innovation is integrated into their plans: 100 percent of Top Performers defined priorities for the next three years, and 80 percent focused on innovating features over that same time frame.

Second, they back up those plans with dollars — 87 percent of top performers allocate more funding for payments innovation than any other area, and 73 percent allocated at least half their budget to innovation.

And finally, they have infrastructure sufficient to deliver on their vision: 73 percent of top performers boasted current core systems that are well-suited for innovation, and 60 percent had existing IT infrastructure that makes innovation easy.

That third step — infrastructural capacity — tends to be the killer, given the scores of banks and financial services players weighed down by legacy systems that didn’t envision the digital future as we are all now living it.

According to the latest edition of the Innovation Readiness report, only  22.3 percent of FIs report having systems that are core payment systems and IT systems are enabled to facilitate innovation. A much larger share, 48 percent, only say their core systems are so enabled. And, the data shows, that 1-2 punch in terms of innovative capacity is terribly important when it comes to offering next-level services — innovating against 13 of 19 possible categories — and the most likely predictor of being a top-performing FI in terms of innovation.

Perhaps most important, they are the most active pursuers of expanding the payment technology they offered. According to PYMNTS data, 62.8 percent of core and IT-enabled FIs have invested in payment technology over the past three years, compared to 22.2 percent of IT-enabled banks.

And while in some sense the data shows the patterns one would expect in terms of banks’ size and their level of core/IT enablement — bigger banks with more assets under management do better across the board than small banks with small assets under control, who are in the category of most likely to be core and IT deficient, according to the data. But perhaps more interesting, when trying to gauge what’s next in the space, are the places where the pattern diverges from the expected norm.

A significant share of medium-to-large FIs with between $1 billion and $25 billion in assets are core/ IT-deficient. At the same time, a considerable portion of smaller banks has effective core and IT systems. FIs with assets below $500 million comprise a greater share of core/ IT-enabled FIs than do those with between $1 billion and $25 billion, at 27.9 percent versus 14.8 percent, respectively.

A long way of saying that size, money and scale are something in this particular race, but they are far from being destiny.

The benefits and costs of being core/IT-enabled or not, however, are quickly becoming predictive of an FI’s future. The more enabled, the data shows, the more quickly and flexibly an FI can respond to changing consumer patterns in areas like credit usable, the more products it can offer and the efficiency it can operate and optimize its offers.

The less optimized and financial institution is, the less it can do any of the above, making it less competitive. Plus, the data showed, innovation isn’t the only headwind FIs that are core/IT deficient report. The broader pattern in the data indicates that FIs that lack access to effective core and IT systems are more likely to encounter barriers across the board, from regulation to budget, compared to core/IT-enabled banks.

As it turns out, while greater capacity around innovation across the board — particularly when paired with investment and planning — tends to yield a virtuous cycle across the board for FIs, good news for the core/IT-enabled FIs out there. Unfortunately for those who aren’t, the inverse is true as is the constellations of issues that arise from a vicious cycle issuing from lack of infrastructure readiness.

Even more unfortunate for the players running behind: Consumers are looking less interested in waiting for them to catch up and more likely to sign on with FinTech players who are exploiting that innovative gap in financial services as an opportune inroad.

And inroad that customers are looking at more seriously than ever before.

Emerging Entry Points

It is no longer accurate to say consumers are going digital — consumers went digital a while ago, and have expectations that even a decade ago would have seemed radical.  According to the PYMNTS Bridging The Gap: Mobile Card App Adoption report indicates that nearly two-thirds of consumers use their digital banking app at least twice a week, over 90 percent of Gen Z consumers have downloaded mobile card management apps and 70 percent of consumers report the mobile app is their preferred tool for card management. All numbers that indicate that a mobile app — sweetened with features like biometric authentication, faster transactions, mobile wallet access, card controls and the like — is now not a-nice-to-have feature, but a-need-to-have one. And, the assortment and number of those sweetener features matters, a lot.

Perhaps more interesting — and possibly alarming for those mainline FIs having a hard time adjusting, getting their core payment systems and IT stack modernized and executing up to expectations — is that customers are also getting more open-minded about where they get those services.

Historically banks have had an edge in this regard, particularly when it comes to consumer trust and where they were comfortable having their funds housed. And while that edge is still apparent,  recent PYMNTS data indicates that for at least a quarter of consumers, that edge is softening. According to our figures, about  24.3 percent of consumers would be “very” or “extremely” likely to open such accounts with these tech companies. About 28 percent reported they could be swayed to switch financial institutions with a better app offering. Among bridge millennials, Americans biggest earning and spending demographic, the figure jumps to 41 percent. When it comes to opening a “bank” account with a FinTech, the number willing to seriously consider it jumps to over 36 percent.

Does it mean that Bank of America and Chase should wave the white flag now and let Amazon, Google and Apple fight it out? No, that would be something of an over-reaction. But should that thicket of banks with between $1 billion and $25 billion in assets and IT and core payment systems that aren’t up to innovative par be worried? Absolutely.

Their innovative gap looks to be turning into a big opportunity for big tech to break into banking.  And given how quickly consumers are warming to the idea en masse, the time is getting short to close off that inroad.

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New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.

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