By Julián Colombo
Julian Colombo is founder and CEO of N5
Innovation has become a cornerstone of the business world in recent years, and the financial industry is no exception. Fintechs have gained prominence in recent years for their agile approaches, innovative solutions, and ability to adapt quickly to customer needs. Meanwhile, the big banks, although they are consolidated giants in the market, often seem hesitant to follow the same path. Which begs the question: How does a ‘bank’, which has thousands of technology professionals and enough capital to invest in innovation, lose to a fintech?
The purpose of this article is not to discredit the capacity of the big banks, but rather to shed light on the often hidden reality behind their operations. To understand this remarkable difference in innovation, it is necessary to consider the context in which these institutions are inserted and the unique challenges that demand equally unique solutions, as they deal with a substantial amount of data, critical transactions, and stringent regulations on a daily basis.
Banks have very particular characteristics. A large number of points of contact such as mobile, ATM, physical branches, among many others, in addition to a business complexity generated by its diversity of products, services and segments. While fintechs and digital banks focus exclusively on the digital world, relying on a smaller number of channels. In addition, they have fewer products and fewer segments, making their ecosystem much smaller when compared to banks.
Another aspect, and the most different of this industry, is what we call “technological entropy”, which is a tendency to disorganize your systems simply because they exist. A traditional bank has thousands of active pieces of software that don’t connect, stop working, have stability problems, or become obsolete. It’s extraordinarily difficult to keep this legacy ecosystem operating while still having innovation.
The complexity of integrating these software is an often underestimated factor. When one bank acquires another, for example, it inherits not only the customers, but also the systems, contracts, and software of the acquired institution. Integrating all of this into a cohesive system is a monumental task and often seems impossible. In a simple analogy, it’s like changing the wing of an airplane while it’s flying.
Another fundamental point that is worth highlighting is the main focus of each institution model. Many believe that the difference is between professionals who work in a traditional bank and those who are in a fintech, but in reality the divergence is in the shareholders. They are responsible for defining what the main focus of the organization is, so while the former tends to focus on profitability and predictability, the latter seeks scalability of services and constant innovation.
Large banks have an intense relationship with customers due to the frequency and criticality of financial operations. This requires a high standard of safety and reliability in its operations, imposing the need not to take excessive risks in relation to technology. This translates into a more cautious approach when it comes to technological innovation.
While fintechs build their own software or look for niche vendors, banks often opt for reputable providers, which for the most part, offer a wide range of generic solutions, which are good for all industries, but perfect for none. While it may seem like a safe choice, these technologies do not fit the specific and unique needs that the financial industry has, and they were not built with the complexity of the legacy systems that these institutions have in mind.
Continued acceptance is crucial to meeting the expectations of customers, who are always eager for new features that bring benefits, from better service to more secure transactions. One of the most significant examples of this agenda is Open Finance. Its rapid growth demonstrates the importance of innovation within the financial sector.
According to Febraban’s 2022 Banking Technology Survey, between December 2021 and April 2022, the growth of consents in data sharing for legal entities was 60%. Information from the Central Bank shows that, at the beginning of 2023, Open Finance reached 15 million unique customers and 22 million active financial data consents.
Therefore, banks’ lack of innovation compared to fintechs is not due to a lack of talent or understanding of their importance. It is largely a matter of context, complex legacy systems, risk aversion, and adaptations to new regulations.