U.S. banks are playing catch-up with Chinese fintechs
China is rapidly become the global fintech champion.
The amount of U.S. mobile payments totaled $160 billion in 2018, while China reached a staggering $40 trillion, propelled by Alipay and WeChat. Although Chinese banks still enjoy heftier margins and lighter regulations than Western institutions, they are aware that fighting Big Tech on volume is not an easy strategy.
That’s why Chinese banks focus on reviewing what “value for clients” truly means as a starting point to design innovative business models based on a new platform concept: the hybrid open-banking advisory platform.
The Chinese conversation should matter to Western banks struggling to differentiate in a more transparent and digitally oriented financial world. It puts into perspective the choice many firms are pondering: whether to focus on scaling faster on volume, or to invest in generating new value such as shifting revenues towards fee-based services.
Generating new value requires innovation. Institutions must replace the traditional product catalog with relationship models based on holistic goal-setting investing. Generating more volume in comparison seems like an easier strategy; institutions assume they just plug simplified, product-driven business models into digital and mobile banking.
However, volume strategies face two major hurdles on digital:
For starters, banks will have to fight head-to-head with Big Tech companies, which have many more digital touchpoints and can more easily win clients in the zero-margins race.
Secondly, digitizing investment products doesn't work well. If banks offer $1,000 personal loans at zero interest on their apps, they can expect a huge number of clicks. But it is also a big risk management problem. And if banks pitch customers to invest $1,000 in a portfolio on their apps, they can’t expect much adoption (as experienced by robo advisers).
Currently, banks rely on these types of traditional platforms: factory, distribution and marketplace.
Factory platforms are fairly product-centric and transaction-based. They focus strategically on back-end operations providing access to their banking licenses as a utility. This is a short-term win and a risky strategy because Chinese Big Techs already have acquired banking licenses.
The distribution model is more client-centric but still transaction based. Banks use artificial intelligence and big data to understand client journeys. Thus, they propose the best product or service which can be sourced internally or delivered through a fintech. This can also be a short-term win and a risky strategy because clients know nothing about banks' efforts to personalize their offers and only receive a product.
The model starts client-centric but the revenues are product-centric, forcing banks to compete on volumes. Once more, Big Tech will always know more than any banks about final clients, due to their prime digital access to personal data.
The marketplace is also product-centric but more service-based. Financial institutions build open banking marketplaces where fintech and bank offers compete to match client demand. Thus, banks make money on fees to access the platform and fintech retrocessions.
This might result in a short-term loss because most banks would struggle to become a large enough marketplace to compete with Big Tech platforms. Also, many clients are not self-directed, and would not feel comfortable to access a totally digital marketplace for investment products and insurance products.
Therefore, financial firms must transform from three directions: From transactions to services; from products to customer centricity; or from branches to open banking.
The advisory model is one which is both client-centric and service-based. Financial institutions can adopt a hybrid model that motivates clients to bank for higher transparent margins. This will save a bank’s profitability by adding real value to clients and repositioning balance sheets sustainably.
Digital is a pull technology (a demand-driven mechanism), while investing and insuring are push economies (offer-driven industries).
That being said, people are more pull-oriented when spending money: they have a clear motivation about what type of products they need when logging into Amazon. Only then does Amazon "push" its best offers to the shopper.
But when it comes to making financial decisions, consumers rely on push-oriented decisions. Most people want to weigh an advisory recommendation first before committing to an investment, as very few understand financial products, the risks and potential returns.
Therefore, the platform configuration on digital banking must also address how humans get motivated when it comes to finance. There can be a hybrid model (human relationships supported by AI) or a digital platform operating with true conversational AI — a technology that is still developing. Regardless, reinforcing clients' understanding about finance will be critical to motivate them on digital banking.
There is the question of whether banks should try to become digital distribution channels of financial products. Jeff Bezos once recalled how in the 1990s, publishers complained that users could share negative book reviews. He explained that Amazon was not a distribution channel of books on the internet. Rather, Amazon's role was, first and foremost, to provide advice to its users about the best book to buy.
Here’s the lesson for banks: if the initial client motivation cannot not be addressed, all other marketing techniques to optimize sales will not be effective. Meaning, clients will onboard but not generate transactions. Negative reviews were the needed mechanism to generate advisory-trust on the platform.
The real scope of fintech innovation is not to digitize products but to form knowledge-based relationships.
Big data and AI have two roles to play. Both will be infused into digital advisory platforms to learn more about clients. But AI is also needed to help clients understand banks and their new value propositions, as well as their attached fees.
By providing clients this transparency and service, banks can create open banking advisory platforms that bundle proprietary and fintech services; generate return on investment from new client-based fees; and differentiate themselves from Big Tech competitors.