For quite a long time, traditional brick and mortar banks only had to worry about making money and being profitable. All that is changing due to emerging technologies.

The banking industry is facing many unprecedented challenges due to the rise of financial technology companies. Industry-leading operators, as well as ambitious startups in the banking scene, are putting a lot of pressure on bank executives to come up with strategic development plans that would defend their business from these emerging fintech groups.

What fintech companies are disrupting the banking landscape?

Most fintech companies fall into four different categories: lending, personal finance management, payments technology, and bitcoin (cryptocurrency).

Lending Club, eToro, SoFi, Faircent, Square, Betterment, Wealthfront, Stripe, and Prosper are some of the fintech companies disrupting the banking scene. Mobile apps like Dave, MoneyLion, PockBox and Earnin are also shaking up the industry.

Consumers are already fed up with exorbitant fees and narrow ranges of products banks offer. Due to this, banks could easily lose customers to fintech companies in the long run.

Consumers are still cautious of untested fintech startups and are choosing to maintain a relationship with their banks. However, some are gradually turning to new fintech entrants to access better value-added products and services.

Why are industry-leading banks maintaining their core systems and why aren’t fintech companies replacing them?

Banks have put off upgrading their core banking systems for such a long time. Even when industry experts alerted them of the upcoming trends, many refused to listen.

Perhaps it’s because updating legacy core banking systems is not a simple endeavor. It’s costly and time-consuming. Sometimes, systematic risks could even arise as a result of mismanagement.

To understand why banks are doing this, one has to look into cost, reputation, and regulation.

• Cost: Banks need to spend a lot of money to revamp their core banking system. They spend more than $100 million to replace their aging core systems.
• Reputation: Traditional brick and mortar banks never fully recovered from the setback they picked up after the 2008 financial meltdown. A decade and so many investments later, outcomes remain patchy. For many consumers, they still hold on to a bit of resentment. Many are therefore willing to embrace fintech to break away from traditional banking. However, people are also quite cautious about new and largely unknown fintech entrants. As they continue to learn more about these companies, they still turn to banks to carry out their transactions.
• Regulation: Core banking has a vital role to play in the retail economy. For that reason, the government oversees every activity involving these core banking systems. They’ve implemented numerous regulations over the years to protect these systems and consumers. Even legacy systems come with complex regulatory solutions.

Is the digital transformation in banks moving too slowly?

No doubt, digital technology is reshaping banking for the better. But are financial institutions even trying to keep up with fintech services and provide customer-centric experiences to consumers?

PWC’s research shows that the world’s bank executives are looking to the future with a burst of optimism. However, several still fear that they will lose their businesses to innovators. About 88% of respondents are worried about losing their business to standalone companies.

If they can’t beat them, they might as well join them. Banks will have to change their mindset and learn to embrace fintech innovations at some point. In doing so, they won’t have to worry about losing their customers and their business to fintech companies.

The future of banking remains unclear. Many believe that fintech services will wipe out traditional banking eventually, but even that might not happen. Financial institutions are learning to partner and integrate with fintech companies. Given their difference in management, regulations, legacy tech limitations, integration won’t come easily.

For most banks, checks and balances are their biggest problem. Focusing merely on those aspects can stifle the innovation process. A cultural shakeup is therefore necessary. Embracing a new mindset should empower banks to embrace innovation and make the partnership less challenging.

Evolution, not Revolution

Fintech companies are influencing market changes by enabling traditional institutions to embrace emergent technologies. These different markets are moving at different speeds for several reasons –legacy system complexities, cost, regulation, and culture to name a few.

With the combination of cost and regulation, there might never be a revolution in the banking industry. But these factors should give these financial institutions ample time to evolve and embrace new technologies that cater to consumers’ ever-changing needs.