You will recall from the Customer Management module that a retail bank does six principal things for its customers:

  1. Keep their money safe, whether it is in a physical or digital format;
  2. Handle payments (incoming and outgoing) securely and efficiently;
  3. Keep track of what they receive and spend to help them budget and save money;
  4. Pay interest on savings deposited with them in return for being able to lend the money out to businesses or other consumers;
  5. Lend customers money to bridge the gap between income and expenditure or buy an asset like a car or a home;
  6. Offer other products help them maintain their wealth or income, such as insurance to protect themselves, their family, home and possessions or pensions and investments that they’ll draw down in the future.

Banking Sector Pain Points targeted

Over time retail banks built up layers of products and services to meet these six principal functions, resulting in opaque and confusing propositions, poor customer experiences that made it harder for customers to manage their money and an expensive cost base because of the complexity that they’d built.

Banking Fintechs targeted specific pain points such as:

  1. Ease of use and accessibility with new products and services to serve unmet needs;
  2. Greater transparency around products, and competitive pricing;
  3. Better personalised banking experiences with specialist propositions focused on a niche product, segment, or group of customers;
  4. An open ecosystem that is agile, easily scalable and reduces the time to market via greater collaboration with third-parties around technical solutions;
  5. Better operational efficiencies at a lower cost.

Strengths and weaknesses

However, it isn’t straightforward being a Fintech. Many of the technology and operating cost advantages of a Fintech can be offset by higher acquisition and funding costs.

Completely digital customer experience.Unproven track record (except where an offshoot of an incumbent bank).
New technology and absence of legacy systems reduces cost to serve.High customer acquisition costs in a saturated banking market, evidenced by free services or attractive interest rates.
Interest of tech giants to open digital banks have the potential to redraw the retail banking landscape.Lower physical distribution cost could be offset by higher interest expenses.
New digital channels and ways of account opening and servicing.Cost of need to tap into incumbent banks’ ATM networks to service the cash needs of their customers.
Ability to tap into underserved consumers such as migrants.High entry barrier and lack of any regulatory arbitrage.

What business challenges does a technology-focused bank address?

  • The ability to automate and scale up complex tasks cost-effectively;
  • Lower acquisition and distribution costs through new partnerships and channels;
  • Reducing minimum viable scale plus rapid and flexible scaling-up to respond to a rapid growth in customer numbers from agile operating structures;
  • Increased access and convenience with 24/7 service through digital channels;
  • Improved customer engagement through a better user interface/user experience;
  • Data-driven business models e.g. open banking and risk-based pricing;
  • Contextualisation through sophisticated and complex real-time analytics e.g. credit scoring, financial advice, real-time interpretation and analysis of photo and video.