When banks finally come to improve their technology experience, they go no deeper than changing the front end. They make a button blue instead of green, or rounded edges on buttons instead of square ones. They think in their interfaces, not in the backend. If a bank really innovated its technology, it would dig deeper into the back end and transform its old technical infrastructure that has been the same for decades. Few today know how to work with those old programming languages of yesteryear like COBOL. Hence, they stick with upgrades that turn the software into a Frankenstein-like horror.
The big banks don’t innovate internally. Large technology conglomerates aren’t even innovative. You acquire new ideas, innovations, and teams that have already carried out the innovation. Sometimes when they want new, undeveloped technology as part of their in-house technology portfolio, they speak to journalists about it so they can cover what is gaining market interest. And then startups start working on the problem. You see the opportunity and start raising funds to carry it out and big tech companies are just watching it. And then, a year or two later, they acquire the best company in the room and make it part of their conglomerates.
The traditional model for the big tech development strategy is to attract startups that are already successful because they can do so without risk. You pay a little more, but have no risk of default. The startup and its investors assume all of the risk. For example, Facebook bought Instagram in 2012 and WhatsApp in 2014 for this very reason. And those purchases raised serious concerns about Facebook’s “data monopoly”.
Financial companies also follow this approach. All great players have acceleration programs for this reason. You will find startups that have ideas that they may want to feed in in the future and provide them with certain resources. Large financial institutions then buy the ideas as soon as they are developed to implement them.
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If a large bank tries to implement a new technology in-house, it may not work. The corporate structure is so rigid that it cannot adapt to new innovations tied into the framework of the bank’s existing technologies and protocols. Without the agility and flexibility, it cannot take the risk of developing and integrating new technologies. The company structure is not well innovative. It takes on commercially – that is, cooperates – a large part of the innovations that it needs through mergers and acquisitions.
Banks should focus on implementing the fintech world’s innovations – especially those that ensure customer privacy and enable safe purchases. If the bank is trying to acquire products, it should also acquire the team and corporate infrastructure. That way, the bank could begin to change its core processes smoothly. There are already examples of this. In one model, the bank arranges secure purchases while working with personal data and transactions, while a fintech acquires customers and provides customer service.
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The revised Payment Services Initiative 2, commonly referred to as PSD2, is a European regulation for electronic payment services that aims to make payments safer and encourage innovation in Europe. PSD2 divides all financial operations into two parts: the first is infrastructure and security, the second is the front-end and innovative customer care. This is a better approach for now, but improvements will be needed in the future.
Small payment services like Revolut, Monzo, N26 and others are growing very quickly. These startups are based on the traditional financial structure, which is based on the banking licenses and licenses of the payment service providers of their partners, and contain innovations from the fintech world. These digital banks develop their competitive advantage and acquire customers in a short time. This model works. Banks have a banking license and money and provide security while outsourcing some of the customer acquisition and support to leading fintech startups. The same model could also bridge the gap between banks and crypto startups.
What should banks focus on in modern innovations? The answer is that on the current technological backbone provided by banks, there isn’t much privacy for users. When we use the services of a bank, an employee there still works with our transaction history and receives more information than in our social media profiles. Who likes it when someone has access to such sensitive data? Probably nobody. Regardless, banks are currently selling this data and information. In certain countries, they can sell information about personal transactions.
When you have a user’s transaction history, you know everything about them, especially in this digital world as cash seems to be running out. Take car insurance as an example. Knowing when a person’s insurance will expire, a company can display or sell ads for that person. For example, if a customer pays for a COVID-19 test, you can start offering them therapeutics. You can also know how many children a person has, what gender they are, and so on.
European banks sell this data under the General Data Protection Regulation (GDPR). This data is a huge profit center for banks. And that figure could be way above what the bank is making from transaction commissions, loan terms and its old profit centers.
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Their clients’ financial history brings immense value to banks, and banks know it. That’s why they focus so much on big data and artificial intelligence. Of course, not only banks have sensitive data about their customers. For example, mobile phone providers could also know where their customers are at any time. While GDPR is a step in the right direction, it should be stricter for that reason. Perhaps companies that work with private data should be required to take out insurance.
It’s time for big banks to go beyond new furniture and be really innovative. Regardless of how ergonomic the branch’s new couch is, the world is calling for better banking. By partnering with crypto startups, major banks can offer improved user efficiency and privacy.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Roman Potemkin is the founder and CEO of Trastra. For the past 15 years, he has been known for successfully bringing technology-first, user-friendly digital banking products to market that are currently used by millions of people.