Fintech VS Banking – Can banks win this battle and become more efficient using technology?
Leumi Bank recently released one of his flag ship products &quot;Pepper&quot;. A digital bank which doesn’t have any branches or even an online website. Is this a smart decision? Would Leumi succeed in attracting the millennials? Is Pepper’s offering enough to fight against the raising Fintech industry?
In June 2017, Leumi Bank officially released one of his flag ship products Pepper. A digital bank which doesn’t have any brick and mortar branches or even an online website. The platform, which is aimed at millennials, aged 18 to 35, was developed as a bank that exists only on a smartphone.
Pepper’s mobile application currently offers basic banking services, including checking, saving, loans and credit-card services, but Pepper said the offerings will expand.
Is this move, of a traditional bank such as Leumi to establish and heavily invest in a digital bank, a smart decision? Would Leumi succeed in attracting the millennials? Is Pepper’s offering enough to fight against the raising Fintech industry?
In the past recent years, we have been witnessing a massive growth of a new industry named Fintech. Fintech is a disruptive technology that aims to make traditional financial services more accessible to the public by simplifying the supply chain and leveraging the use of digital.
In that respect, it essential to understand the threats and opportunities brought by FinTech to the sector. For example, transfer of money, a major class of asset transactions that commercial banks are involved in. Banks can typically gain two potential efficiencies. First, by allowing for direct settlement, the technology enables further speed up and lower transaction costs of existing processes. Second, banks can complement payment systems with attractive and competitive new services such as applications to provide customers with richer and enhanced real time information.
Bank Leumi, second largest bank in Israel, employees over 12,000 employees in Israel and in overseas offices around the world.  Leumi acknowledges the threat Fintech impose and realizes that to stay relevant in the near future it should leverage digital solutions and become more efficient in its supply chain. Pepper’s CEO Lilach Bar David elaborated:
“Do people like their bank? Not so much. Do they like to go to the branch? Apparently not. Do they feel frustrated from the experience? Apparently Yes… you enter your bank, open an account, sign a lot of papers, without really understanding what you are signing on… we believe such processes should be simplified therefore we do not only create a new user experience, but we redesign the entire system” 
Pepper was developed over two years at a cost of 150 million shekels ($42.6 million). While Pepper doesn’t have its own banking license, it operates separately from Leumi and counts 150 of its own employees in an atmosphere that resembles a financial-tech startup.
“We’re talking about a major investment even by the standards of Bank Leumi,” said Tamar Yassur, head of Leumi’s digital division. “Our business plan calls for hundreds of thousands of clients joining us in the next few years and within the next two to three years Pepper will be profitable.” 
One month after Pepper’s launch, Leumi announced its second efficiency plan in a year in which 500-600 employees will resign by the end of the year, saving approximately 200 million shekels annually starting from 2018. Leumi sees the digital revolution as an opportunity to make substantial efficiency processes including labor and real estate.
According to this strategy Leumi closed 16 branches in 2016, closed a total of 48 branches since 2012, and plans to continue to close, in the medium term, at least 10 branches annually. 
In addition, to assist the older customer base adapt to the digital revolution Leumi initiated a program called Israel.il which includes personal training, tutorial videos and free digital conventions to overcome the digital gap. 
Is That Enough?
Although Leumi is moving in the right direction, it is not fast enough to react and implement the already existing technologies. Blockchain, for example, a shared ledger of transactions maintained by a network of computers on the internet, is the most revolutionary technology within the Fintech industry  that is yet to be used by Leumi. My short-term recommendation is to introduce blockchain into their operation.
JP Morgan recently launched a new payment processing network that uses blockchain technology, Emma Loftus, J.P. Morgan’s head of global payments emphasized how the network will allow payments to reach beneficiaries faster with fewer steps and better security “Blockchain capabilities have allowed us to rethink how critical information can be sourced and exchanged between global banks.” 
To increase the ability to adapt to new technologies I would recommend in the medium term for Leumi to establish an innovation Lab, an independent unit that is responsible to be on top of innovation, introduce latest technologies and tailor them to the business.
Questions remain: would Leumi still be able to serve the older customer base who is not adaptive to technology while continuing to close branches that serve that audience? Will millennials be attracted to Pepper instead of the Big Tech companies?
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Student comments on Fintech VS Banking – Can banks win this battle and become more efficient using technology?
Shosha, this is a fascinating example of a new industry (Fintech) being disrupted be an even newer entrant (Leumi). To your point about serving older customers who may not be “adaptive to technology” – the hurdle in adopting Pepper may be more than technology. The two customer segments identified (millennials and older customers) are likely to have different banking needs. Millennials are more likely to value online transactions, mobile banking, etc. Whereas, the older customer is likely to seek additional services as well – home loans, other loans, credit cards, etc. Additionally, as the millennials of today get older, they are likely to have similar personal finance needs as the current older customers. Therefore, unless Pepper can expand its value offering, it runs the risk of losing customers in the long run to other full-service banks.
Hi Shosha, I really enjoyed your article as I find the reactions of incumbents in financial services to new entrants very interesting. One of the potential issue I see for the Leumi Bank will be to attract the right talents to smoothly switch from a traditional bank to a more technology-driven institution. As mentioned in your article, Leumi’s answer to Fintechs was rather reactive. As new technologies, such as the Blockchain, appear, they will have to constantly evolve and innovate, and will therefore need top engineers and developers. But between the “cool” Fintech startups and the “well-paid” jobs in Big Tech, how do you attract these talents?
Great article Shosha! It is fascinating to learn about the disruptions in the financial services space since so many are reliant upon this industry. I do question, however, Pepper’s ability to attract customers who may be wary about the security, trust, and customer service aspects of a completely online bank. Call me old-fashioned, but I for one would be hesitant in trusting a bank that I can’t visit (whenever I have any issues in my account I just walk to my nearest branch), especially one that doesn’t even have a banking license! I guess that Bank Leumi’s backing certainly helps, but I envision a large marketing campaign would be required to achieve the sort of customer usage that would make Pepper a profitable investment for the bank.