Banks are struggling to keep pace with the disruption caused by emerging financial technology tools, according to the World Retail Banking Report (WRBR) for 2016.

FinTech providers are making increasingly significant inroads with customers, yet the vast majority of banks admit they are not adequately prepared to manage this emerging FinTech threat, the report shows.

In fact, nearly two-thirds of customers (63%) are now using FinTech products or services, and are much more likely to refer friends and family to their FinTech provider (55%) than to their bank (38%). However, while 96% of banking executives agree that the industry is evolving toward a digital banking ecosystem, where Fintech providers play a much bigger role only 13% say they have the systems in place to support it.

With penetration highest in the emerging markets and among younger customers, Fintech service providers are gaining popularity among consumers thanks to the perception that they are easy to use (82%), offer fast service (81%), and provide a good user experience (80%), the report finds.

Banks, however, underestimate the value placed on these services with only 36% agreeing that FinTechs offer fast service (a 45 percentage point gap) and only 40% agreeing that Fintechs provide a good experience (a 40 percentage point gap).

Customer experience up, but does it even matter?

Globally, banks improved their customer experience performance by 2.9 points on Capgemini's Customer Experience Index (CEI) , with gains in more than 85% of the countries surveyed. However, this overall advancement did not translate into tangible results in profitable customer behaviour, such as retention, referrals and cross sales. Only 16% of customers, for example, said they are likely to purchase an additional product from their bank.

Banks view trust as their greatest strength (70%), but while they currently enjoy higher rates of customer trust, FinTech firms are quickly catching up, with the percentage of customers who completely or somewhat trust their FinTech provider reaching more than 88% across all regions.

However, despite the rapid pace of change continuing to accelerate, a concern recognised by 90% of banking executives, less than one quarter feel they have an advantage over FinTech firms in terms of agility or ability to innovate to address these challenges.

“The inability of banks to innovate leaves the door wide open for FinTech providers to attract new customers,” says Sharon Rode, Capgemini Australia banking industry practice lead.

“There is opportunity for banks to begin working collaboratively with these companies, but they must formulate a rapid response plan to do so before the swiftly evolving bank environment outpaces their window for change,” she says.

Taking a new course of action

In order to respond to the threat these companies pose to more traditional models, nearly two-thirds of bank executives say they need to view FinTechs as partners, with the majority of bank development strategies taking the form of collaboration (46%) and investment (44%). Less than one-fifth (18%) say they plan to acquire FinTech firms or their technology.

“The willingness to partner with FinTech firms is a recognition that banks are unprepared to operate in a future that consists of a series of secure digital interconnections,” says Vincent Bastid, Efma secretary general.

“By partnering with these companies, banks can gain much needed guidance in product development, as well as a stronger voice in defining a central role for themselves in the current banking environment,” he says.

Banks and FinTechs have strengths that are complementary and which should be leveraged to create a stronger central financial experience for customers, the report indicates.

While FinTechs excel in agility, innovation and exploiting new technology, banks offer capital, deep customer bases and expertise in working with regulators, the WRBR says.

According to the report, banks need to ‘think big' as they strive to meet evolving customer demands in the digital age. Revamping core systems and establishing full competency in API-based software development will be high priorities.

Banks will only be able to achieve their full growth potential by fully accepting the growing role of FinTech providers and creating pathways to work with them as the digital financial network continues to evolve, according to the WRBR.