Finance myths traditional banks would rather have you believe

It’s happening all over the world - people are shopping in ways that would have seemed magical to someone only 10 years ago: by waving contactless cards and phones; by sending money with email, by SMS, by messenger apps, or by taking a photo; and, in return, coffee shops are refusing to take cash. The list goes on, as digitally-savvy banks and challenger startups compete to wow customers and lure them away from the physical banks into online and mobile banking. Yet the traditional, old-school banking executives continue to insist that without their massive infrastructure and maintenance, spending modern banking - as we know it - would collapse.

We in Genome decided to fact-check their criticism of the fintech challengers and their assertion of playing the key role in “keeping the lights on” for all of the banking services each of us use every day. As one of those challengers, we looked into the most common criticisms traditional bank spokespeople use in justifying their inertia and the poor track record in new technology adoption to solve customer problems and frustrations.

Myth #1: Traditional banks are subsidizing all of the modern banking

Traditional bank CIOs often claim that without their investment in the very expensive financial infrastructure, it would collapse. Startup challenges often rely on organizing business processes with cheaper modern technologies like big data, cloud computing, artificial intelligence, and blockchain. This is all unfair since the challengers have a lower cost base while getting a free ride on top of the system that the old banks had been investing in.

Banking infrastructure facts

Traditional banks spend a lot on technology – over USD 100 billion per year in North America alone, according to boutique research and advisory company Celent – about 70 to 80 percent of which is spent on maintaining existing systems. But those are not the systems that run transactions for everybody. Most of that money is sunk into running systems accumulated through banks’ mergers over the decades. These systems are expensive to keep running, but are even more expensive to merge – so good money is spent on bad, fragmented internal systems that do little more than duplicate work.

The infrastructure that is important to the financial systems is still running thanks to card processors since both traditional banks and upstarts rely on Visa and Mastercard, massively profitable card networks.

Myth #2: Once hipster bank’s got your money, it’ll cost you getting it back

Traditional banks use rhetorics of technologies coming at high cost. They specifically point out the huge fees for moving money in and out of wallets and accounts, unlike banks where it’s free. This, of course, is meant to create an impression that, without old banks, finance is doomed.

Money management and money transfer facts

Banks charge huge commissions, markups and hidden fees for moving money, especially cross-border. No branches and legacy costs mean the same services by fresh banking businesses have much lower or no fees at all above the interbank (look at the TransferWise compared to Western Union for international transfers, for example). In fintech startups, clients are viewed globally not regionally, so moving money between accounts is free (check out e-wallets like Genome).

Myth #3: Fintech ignores the legal aspects and due diligence

Banks are praying on people’s hate of changes, which is especially effective with startups. Thus, the rumors about fintech companies accepting anyone without verifying their identity – which makes it easy to pass their verification checkups and obtain personal information from the client’s database - are still very much alive.

Due diligence and KYC facts

Banks are just as vulnerable to money laundering scandals (incidents with Swedbank or Deutsche Bank prove that point). Neobanks’ KYC, AML databases and procedures are the same as banks’, but their electronic checks (versus traditional paper forms) are more reliable and less human error prone. Keep in mind, that overconfidence and sales of the poorly understood mortgage securities caused the financial crisis 10 years ago.

Myth #4: Newbies to finance don’t understand fraud and risk

Banks have years of experience in recognizing and fighting fraud. They appeal to time spent on learning how to manage risk correctly for different clients and businesses. How to navigate “friendly fraud” and not to block user’s cards if it’s unnecessary. Praising that every startup founder is dreaming to launch a cryptocurrency and other poorly understood financial product market and how to navigate it securely.

Risk management and anti-fraud facts

As customer purchasing behaviour changes, risk and fraud patterns of yesterday will not be accurate tomorrow. Scammers’ behaviour is always evolving, so risk management and anti-fraud are ongoing activities, ideally done by machine learning for spotting new trends and experts. This can be done by implementing a specialized risk management solution that’s more reliable than the systems most banks have in place -- after all, why do you still have to call your bank before you travel abroad, and still can have your card blocked?

Myth #5 People don’t trust “electronic money” and they’d rather use banks

Banks are still the leaders of the financial world in terms of operational volumes. According to Cornerstone Advisors Research, USD 300 billion moved through them and credit unions in 2018. Bank executives keep reminiscing about the “good old days”, selling ‘personal approach’ benefits rather than using the lifeless and faceless support system fintech startups operate.

Financial Consumer Facts

Digital account opening is a top fintech request for banks. They are investing more in digital banking, automated systems, and loan technologies, not to be left behind by the rapidly-developing fintech startups. 48% of institutions surveyed worldwide said customers look for options to open a checking account completely online, according to Digital Banking Report, so banks better be ready to replace physical branch offices with hi-tech customer management systems. Business globalization and the rise of P2P payments are about to take a good chunk from what bank and credit union executives have on their plates.

Genome’s Chief Operational Officer, Daumantas Barauskas, is optimistic: “Despite the differences, the global financial community is adapting to market digitalization and overcoming new challenges. Bank executives started accepting the fact that fintech companies are here to stay and it’s better to adapt than to remain in confrontation”. There are more players in the field. For example, Facebook just launched its first cryptocurrency, and the director David Marcus says that “Libra’s (token’s name) mission is to enable a simple global currency and financial infrastructure that empowers billions of people.” How will it affect peer-to-peer payment and banking operations for businesses? We will find out soon.

About Daumantas Barauskas

Daumantas Barauskas is the CEO of Genome. He is a fintech expert with ten years of experience in business development and implementation of new technologies.

About Genome

Genome is the online finance ecosystem that helps merchants to accomplish everything related to payments online. Open Merchant Accounts and IBAN settlement bank accounts fully online in under 48 hours. No unnecessary paperwork, no waiting - just a clear and transparent online service with the freedom to accept online payments, transfer money to any account in any currency at rates much more reasonable than those offered by banks and other payment processors.