Fintech Veteran Argues that Banks Achieving Functional Parity with Fintechs Isn’t Good Enough, Much More to Offering Modern Financial Services

Frank Rotman, who claims to be a 27+ year Fintech veteran and the Co-Founder of QED Investors, reveals that he talked to a bank executive who was “proud of finally getting to functional parity” with Fintech service providers in “a particular space” that financial tech firms have been “dominating” as of late.

However, Rotman says he’s not quite sure whether the banking professional really understands that this is not enough. He goes on to share a parable.

Rotman noted:

“There once was a little boy who had a bad temper. His father gave him a bag of nails and told him that every time he lost his temper he had to hammer a nail into the back of the fence. The boy didn’t care so by the end of the first day he had driven 37 nails into the fence. But driving nails into the fence gave the boy blisters and wasted precious time playing with friends. So over the next few weeks he learned to control his anger and the number of nails he hammered daily gradually dwindled.”

Rotman added:

“Finally the day came when the boy didn’t lose his temper at all. He told his father about it and the father instructed the boy to pull out one nail for each day that he was able to hold his temper. The days passed and eventually all the nails were gone. The father took his son by the hand and led him to the fence. He said, ‘You have done well, my son, but look at the holes in the fence. The fence will never be the same. When you say things in anger, they leave a scar just like this one.’ …’You can put a knife in a man and draw it out. It won’t matter how many times you say I’m sorry. The wound is still there. So be careful with what you say and what you do because you can’t always undo damage done.'”

Rotman added that some consumers are beginning to adopt banking products and services from Fintechs firms even after banks have managed to catch up from a pure “functional parity” standpoint. He further noted that many of them “feel let down” by their current bank because of issues such as balance requirements, hidden fees, rejections for loan products, among other problems.

Rotman had previously noted that many consumers have asked why traditional banks can’t simply copy Fintech functionality and then “crush them with their scale and advantaged funding and regulatory apparatus.” According to Rotman, this may be challenging since incumbents are in the “functional relief” business instead of the “magical transcendence” business.

Rotman added:

“While so many Banks want to believe that they can compete with best-of-breed Fintech companies, it’s a **mostly** true generalization that the two factions don’t approach product construction and service delivery in the same manner. For any given product or service, Banks ask themselves: ‘What problem does the customer want us to solve?’ and ‘How can we deliver a solution in a safe and compliant manner?’ and ‘What friction can we reduce in the process that will remove costs and improve throughput?'”

He continued:

“Fintechs start by assuming there are already solutions that exist in the market that work but aren’t yet perfect. They ask: ‘What can we do to improve upon existing market solutions that will create a magical and transcendent experience for our customers?'”

Rotman further noted that banks are trying make sure their solutions work. Meanwhile, Fintech companies are focused on ensuring that their solutions “delight.” He also noted that banks want to simply improve the products they already have. And Fintechs aim to “reimagine what’s possible.” Banks are “about trust and stability” and Fintechs are “about community and belonging,” Rotman argued.

He added:

“The truth is that Fintechs need to find their reason d’etre while Banks don’t. Most Banks already have a complete product suite, a distribution strategy that’s worked to get them to their current scale, and self-sustaining P&Ls that are designed to weather systemic shocks. But these same Banks are starting to lose business to Fintechs because customers will choose ‘magical transcendent’ experiences over ‘functional relief’ transactions if given a choice. And given the Cambrian Explosion of Fintech startups customers now can make this choice.”

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