The Financial Services industry is changing beyond recognition. The huge growth in mobile devices and digital forms of banking has fundamentally altered the way today’s consumers manage their finances and weakened their relationships with their bank.

In recent years the industry has seen an explosion of new fin-tech start-ups that are actively disintermediating the banks from their mainstream customers, such as TransferWise and Nutmeg, as well digitally enabled banks including Number26 and Atom Bank (due to launch later this year in Germany and the UK respectively).

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NESTA predicts that the alternative finance market in the UK will grow to around £4.4 billion in 2015, having grown at over 150% for both 2013 & 2014. 

Goldman Sachs also published a report called ‘The Future of Finance: The Rise of the New Shadow Bank’, where it estimated that over $11 billion of annual profit could be at risk from non-bank disintermediation over the next 5+ years. That works out at 7% of current profits.

So what are retail banks doing to protect themselves from this emerging threat?

Embracing lean startup

Large global financial organisations are typically inflexible and incredibly slow to adapt as a result of regulation, complex management structures and processes. The challenge is getting them to change their mindset and traditional structures in order to start thinking and creating like the start-ups that are threatening their business models.

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To survive the Banks are starting to adopt Agile and Lean methodology processes championed by Eric Reis in his book ‘The Lean Start-up’ to deliver change quickly and improve the product development process.

The Lean Startup approach relies on 'validated learning', rapid scientific experimentation in order to shorten product development cycles and measures actual progress without the need for vanity metrics.

It helps companies learn what their customers really want and enables them to shift directions with agility. It offers organisations of all sizes – a way to test and adapt their vision continuously and provides a scientific approach to creating and managing successful companies in an age where they need to innovate more than ever.

Todays’ banks must ensure that they can provide high quality digitally based products and services needed to support modern consumers and businesses. Technology is constantly evolving and organisations cannot afford to spend two years testing, refining and developing an idea anymore.

By developing a Minimum Viable Product and testing it with a small sub-set of customers, people quickly become more confident in Agile and Lean development processes, creating an environment where innovation is able to flourish.

Innovation labs

All successful innovation projects have one thing in common – a team of innovation champions who are dedicated to developing new ideas and driving these forward. Often known as ‘Innovation Labs’, these usually start as entirely separate business units who are focused solely on innovation and product development and are not involved in the day-to-day running of the organisation. It is crucial to get the right people involved – the people that really want to facilitate change.

Partnering with the competition

Many banks are recognising that they will have to work together with Fintech. Renaud Laplanche, the founder and chief executive of Lending Club said, 'I believe that it is in the best interest of both banks and marketplaces to form partnerships to further reduce the cost of credit to consumers and businesses.'

Leading retail banks such as Lloyds and Barclays are partnering with organisations like Start-up Bootcamp and Level 39 to try and absorb some of that innovative start-up culture.

RBS has sponsored Y-combinator start-up GoCardless to the BACS network since 2012. Banks need to be on the look out for service differentiation and partnering with or acquiring innovative technology from someone who already does it well is often simpler than starting from scratch.

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It has been said that the average person in the UK keeps faith (or puts up) with their current account provider for 42 years but surely in today’s environment this is changing. It’s not all doom and gloom for the banks though.

Existing players have a huge wealth of assets at their disposal and if they can adopt the approach and techniques of start-ups, they have the potential to become what we term ‘Super Start-ups’. Banks must embrace these key principles to transform their organisations into agile, adaptable, fast moving ‘Super Start-ups’ in order to stay in the game.

Sourced from Paul Dawson, Founding Partner, Fluxx