Our latest Off Script event featured two back-to-back debates with Jim Marous, Co-Publisher at The Financial Brand, and Ron Shevlin, Director of Research at Cornerstone Advisors. The first debate focused on five challenges facing financial institutions, while the second debate focused on five challenges facing fintech companies. 

Let’s look at five highlights from each debate, which you can watch here.

Debate #1: Challenges for Financial Institutions

As we explore in our Ultimate Guide to the Top 2021 Bank Challenges, we’ve used internal and external research to pin down five key challenges facing banks and credit unions in 2021, including: 

1. A legacy mindset. Fixating on costly branches and in-person interactions at the expense of digital innovation increases your overhead and weighs you down.
2. A broken approach to build vs. buy. Building an ideal digital experience completely in-house is expensive, cumbersome, and slow.
3. Not knowing your customers. Not having a 360-degree view of your customers means you don’t really know them. 
4. Data paralysis. Neglecting your internal data puts you at a long-term disadvantage.
5. Poor digital banking. Being stuck behind the curve on digital banking features cripples your ability to retain customers and win new ones.

Legacy Mindset Vs. Legacy Knowledge

“I don't think there's a single bank or credit union CEO out there who thinks that he or she and their management team has a legacy mindset,” Ron Shevlin says. “When they hear legacy they think of legacy cores and legacy technologies, but I think we have to expand that thinking to legacy assumptions about the market, the role of physical spaces, and the role of person-to-person interactions.”

“Look how we're interacting today — we did not need to come together in person,” he says and adds that banks should "start thinking more about how technology can enable those person-to-person interactions not necessarily displace them.”

Marous agrees that even though it’s true that many bankers hold a legacy mindset, “We have to remember that we don't want to throw out their legacy knowledge.” He says, “They are the most able to see what needs to change. The key is to actually have them pull the trigger and do that change. A lot of times when you're seeing digital transformation stall it is because management is not fully committed to the process.” And he adds, “We need to make sure that we also leverage these people's experiences as they apply toward the future.”

Build Vs. Buy Vs. Partner

Marous says that going forward partners will continue to play an essential role for financial institutions. “When you look at most institutions today,” he says, “most don't have the depth of experience in the areas of data and analytics, technology, and actual transformation. That's where partners really come in handy.”

Shevlin says that the typical premise on this issue is wrong. “Build or buy is the wrong structure of the question,” he says. “Today's reality is that it's build and buy and then integrate, enhance, and partner. It's all five components. The challenge for a lot of institutions is to really understand how you combine all five of those elements.”

He adds that financial institutions tend to be tragically understaffed when it comes to actually implementing partnerships. “I surveyed financial services executives last December,” he says,” “and more than 50% of banks and credit unions say that partnering is a critical aspect of their overall business strategy and yet, on average, most mid-sized financial institutions only have two full-time equivalents in fintech partnerships.” For Shevlin, that’s not sufficient.

Know Your Niche, Know Your Customers

Marous talks about the poor track record of banks on this front, giving the example of a bank he’s been a customer with for more than 15 years asking him what he wanted his minimum account balance to be before they sent a notification. Given how long he’s been with the bank and how much data the bank has about him, Marous says the bank should be able to know what he needs, similar to how Amazon and Netflix know. “Why doesn't my bank know me that well when they have all the technology and the data to do so?” he asks.

Ron Shevlin shares that fintech challengers are thinking about segmentation in a totally new way that will catch traditional players off guard. He says, “If you look at what this whole new influx of challenger banks — companies like Daylight, which  serves the LGBTQ community, or Panacea Financial, which serves young physicians, or First Boulevard, which serves African Americans, or Cheese serving Asian Americans, or Aspiration serving the environmentally conscious consumer — these fintechs know their customers even before they’re customers. They are identifying the unique needs of various segments, and the challenge that so many financial institutions and incumbents have is there's no focus in the local community.” 

The Most Important Digital Banking Features

Shevlin talks about the need for banks to use data to know how to prioritize their digital banking features. “I actually just published an article a couple weeks ago on the most important mobile banking features,” he says. “There are clearly some things that stand out as being important across the board. Number one is the ability to do very near real-time fraud and account balance alerts. ... Number two is the ability to turn the card on and off. … [Number three] is mobile deposit.”

Marous talks about the importance of optimizing the onboarding process, saying that Apple Card has set the bar high. “It takes four screens,” Marous says. “The first one asks, ‘Is everything we have about you right?’ Next, ‘What are the four digits of your business or social security number?’ Next, ‘What's your annual income?’ During that time they're writing the credit bureaus and getting all the other data they need for Know Your Customer. Next, look at the rules and regs. Okay. The next message I get from them is, Your account is open and you'll see that your Apple Card is in your wallet already on your phone. That's what consumers want. They want immediate gratification. They don't want to go through a long process.”

Rapid Fire Questions, Round One

The debate ended with a series of rapid fire questions:

Coke, Pepsi, or Dr. Pepper?

Jim Marous: Green smoothie.
Ron Shevlin: Kombucha.

2020 and 2021 have exposed significant vulnerabilities for financial institutions. True or False?

Ron Shevlin: True.
Jim Marous: True.

Fintechs represent an enormous competitive threat for banks. True or false?

Ron Shevlin: Neither. It's both. You can't you can't lump all fintechs under a certain label.
Jim Marous: I would go with both too. If you don't make them an opportunity, they’re a threat.

Consumers will quickly return to previous experience expectations and FIs will continue to invest in legacy systems and strategies. True or false?

Ron Shevlin: False.
Jim Marous: False. 

Debate #2: Challenges for Fintechs

As with the debate on the challenges facing financial institutions, we outlined the five top challenges facing fintech companies today.

1. Reliable data for decision making: A lack of informed decision making leads to less useful products and a frustrating user experience. Non-FIs need reliable access to financial data to power their products for real-time decisions and a seamless user experience. 
2. Friction in connecting accounts: If the process to open an account during onboarding is lacking users will simply drop-off and abandon the application. With limitless choice and lower barriers to switching providers, users are looking for organizations that make the process easy and quick. 
3. Ability to scale quickly: The need for rapid innovation is a barrier for many organizations that need to scale quickly. Building intelligent and personalized experiences quickly and being first to market is a make it or break it for most fintechs. Building these technologies in-house is costly and time consuming, fintechs will have to know where it makes sense to partner vs build based on their focus and other players in the marketplace. 
4. Flexible technology solutions: Enterprise level solutions take time to integrate and implement, slowing down growth. Non-FIs need flexible solutions that can grow with them as their products mature. 
5. Engaging products: With so much competition, Non-FIs need products that have an exceptional user experience, or their customers are likely to go somewhere else. THey need to create sticky products that keep people engaged on their app and make it hard for them to find a replacement. 

Reliable Data for Decision Making 

Shevlin starts the discussion by noting that there are two main types of fintechs: the ones who compete with traditional financial institutions and the ones who work with them. For the fintechs who compete, Ron says, “the key is about how to integrate data into the product offering itself and how data becomes part of the product.” He goes on to say, “To a large extent, the incumbents go out there with generic products and services and don't really bake data into what they offer.”

For fintechs who are helping serve financial institutions, Shevlin says, it’s about “recognizing that financial institutions are completely deluding themselves when they think, ‘Oh, we have so much great data internally.’ They don't.” The fintechs who are providing services should understand where the weaknesses are in both the data that the institutions have, and very importantly, how they utilize that information. That’s what will help to differentiate those fintechs.”

Marous agrees with Shevlin, adding “in much the same way you look at the Chinese environment in the what's going on in the fintech space. They have all made headway, because of the use of deep data and looking for different ways.” When it comes down to it, Marous states, “It’s not that the banks don't have data, it’s that they don't utilize it. We've got to move from making great reports to making great experiences.”

Frictionless and Secure Connectivity

Marous says that “people's trust level goes up with the amount of value that's provided.” Using Amazon as an example, he states “If they had a breach and they handle it fairly quickly, they’d lose virtually no consumers. Why is that? Because of the value proposition.” According to Marous, consumers think, “Okay, I haven't lost anything, Yes, things are putting me at risk, but on the other hand, I'm going to put risk and trust together.” Essentially, because Amazon has built so much customer trust and loyalty with their frictionless experiences, people are willing to deal with the risk. 

Shevlin has a different take on this, stating “As fintechs begin to take on the burden of security, the most overlooked aspect is the vetting process for partnerships who are helping with that security. I think too much of it is being handled through partnerships without rigorous evaluation and vetting. Too much of it is deal based and personality based, and often doesn't go deep in the process.”

Ability to Scale Quickly

Marous dives into the fintech landscape stating, “Virtually all these fintechs, if you go outside the top four or five, are relatively small. But I think one way that organizations have been able to scale and make headway is the consumer.” Marous reflects on a personal example, “I have multiple apps that have eaten away at the outside of the traditional banking relationships that allow fintech organizations to thrive. The traditional finance institutions may not even know they've lost that part of the business.” He goes on to say, “If these organizations scale to different areas of banking that they're not currently in, I'm going to trust them because they've proven their worth, as far as being a capable and comparable partner in my banking.”

Shevlin talks about trust in the fintech landscape as well stating, “I do think, to a certain extent, that fintechs have developed trust in a relatively fast and quick time frame and there's a few reasons why: authenticity, affinity, and policy.” In many  ways, fintechs are more approachable and relatable, as Shevlin adds, “Fintechs come across as more authentic than traditional financial institutions in their marketing and in their communications. And because fintechs are appearing to be more consumer friendly with their risk management approaches, it builds trust with consumers.”

Creating Engaging Products

“The key is really about how to integrate data into the product offering itself — to figure out how data becomes part of the product offering,” Shevlin says. “To a large extent, incumbents just go out there with generic products and services and don't really bake data into it.” He then gives an example of a company doing this well. “Take Aspiration, for example, who serves generally consumers who are environmentally conscious. Aspiration has scored companies on their Environmental Protection Index — how environmentally friendly they are. So they’re able to look at its customers' spending habits and give them an environmentally friendly score to help them understand whether they are spending their money in an environmentally friendly way.”

Marous agrees with Shevlin, adding,”It's not that the banks don't have data; it’s that they don't utilize it. They’ve got to move from making great reports to making great experiences. … They use data to say how well they’re doing and what their numbers look like and they never redeploy because they don't know how to process that in many cases.”

Rapid Fire Questions, Round Two 

Like the debate about financial institution challenges, this debate featured a rapid-fire section. Here are some highlights:

Big tech will put banks out of business by 2040. True or false?

Jim Marous: I don’t know. I can’t tell you what’s going to happen in 2025.
Ron Shevlin: Absolutely false. It’s the other way around. Big tech is what’s going to keep banks in business.

Favorite baseball team.

Ron Shevlin: The 1969 Mets.
Jim Marous: 1954 Indians.

Crypto will be the currency of the future.

Jim Marous: As it’s structured today, false.
Ron Shevlin. Central bank digital currencies will be the currencies of the future.

Fintechs need additional regulations. True or false?

Ron Shevlin: True
Jim Marous: True

Fintech valuations are only going to rise as they continue to steal market share from financial institutions. True or false?

Jim Marous: If you'd asked me this four months ago I would have said false, but crazy money is out there still.
Ron Shevlin: Valuations are going to rise in the short term.

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