There’s a real fear in banking that the industry is headed for turbulent waters, with some experts even warning that the banking institution, as established traditionally, is on its deathbed.
The Global Banking and Finance Review is one such peer review platform that’s warning banks to “reinvent or die.” According to Pedro Pinto Coelho, Banco BNI Europa CEO, who periodically contributes to the platform, emerging technologies in the finance sector pose a massive threat to the traditional bank.
He asks a simple question – how do you make payments at the store these days? What about money transfer? Do you need to go to the bank anymore?
For most people, it’s no longer necessary. We now pay using cards and, more recently, mobile. In China, nearly 80% of payments and money transfers are done via mobile apps. A growing number of people are also choosing to open savings accounts through providers other than banks.
The follow-up question then becomes – why do we need the bank when nearly all traditional banking activities can be achieved without them? The answer to this will tell you why banks are on the brink.
Sam Stewart, a Boston Consulting Group (BCG) partner and co-author of the recent BCG report; Global Retail Banking 2019: The Race for Relevance and Scale, is another expert who believes that times are changing and banks must too.
“Customer behaviors are shifting. The majority of consumers now want banking capabilities embedded in their daily lives,” he says. “The combination of these expectations and tech-enabled solutions could rob traditional banks of their inherent advantages.”
According to S&P Global authors, Stuart Plesser, Devi Aurora, and Brendan Browne, it’s an especially tough time for “smaller banks and community banking systems” without the resources to compete on a digital front.
FinTechs; the Main Threat
Financial Technology companies (aka FinTechs), which seek to capitalize on the interplay between conventional banking systems and technology, are particularly a huge threat.
FinTechs provide digital currency and money management services, promise lower fees thanks to minimal overhead, and guarantee better customer service (such as instant withdrawals and payments). All these are features with significant appeal to the digital consumer.
It partly explains why at least 84% of Americans now use a FinTech platform to manage their finances. Even better, the majority of these people use three or more financial technologies for finance management. One third use these financial applications daily while about two thirds (69%) use them once a week.
Aside from the exceptional convenience, reach is another factor that gives FinTechs a massive edge. Approximately 1.7 billion people globally don’t have a bank account currently. FinTechs come as a savior for these people by providing an easy way to access banking services without a bank account.
Factors to Shape Future Banking
KPMG’s recent report, The Future of Digital Banking, attempts to explain how the confluence of changing consumer preferences and the emergence of FinTechs will shape future banks.
In the report, KPMG foresees a future where banks completely embrace technology, resulting in a banking landscape that’s “far more competitive, efficient, and innovative in delivering ‘autonomous experiences.’”
The report envisages that the banks will come to accept technology as an enabling rather than limiting factor. Therefore, instead of crumbling under, banking institutions will harness digital capabilities to put the customer firmly in control of their banking experiences.
Four key factors will be at the heart of the revolution; data, business models, regulations, and technology.
1. Data at the heart of banking activities
Data is expected to become widely available as humans and machines continue to interact. By 2030, it will be at the heart of how banks deliver to customers.
Unfortunately, up to now, banks have had to deal with damaging trust issues. Many people aren’t yet at the point where they can fully trust banks and other financial institutions with their personal information.
This scenario won’t last forever. As people continue to interact and become more data-aware, they will slowly learn that as long as you share your information with the right people and for the right purpose, there’s nothing to fear.
It’s also plausible that trust becomes a key differentiator and key value proposition among financial services providers. If consumers can’t trust you, they’ll go to someone they can trust.
2. Different, more customer-centric business models
Up to very recently, it was upon the bank to decide what the consumer gets. Actually, it happens even today, albeit to a smaller degree. They decide when you can withdraw, when you can deposit, where you can bank, and so forth.
You can only deposit or withdraw at a physical bank outlet during working hours, typically between 8 am and 5 pm. Before the arrival of ATMs, you could only bank during these hours. Banks also come up with the savings plans and most other consumer-facing products.
This model will change significantly over the next 20 years to the point of becoming obsolete. Instead of the bank making the decisions, the consumer will take control.
The prediction is that banks will “re-bundle” relevant services around key customer needs, journeys, and experiences beyond the realms of traditional financial products. Many banks, for instance, will partner with giant brands to provide adjacent finance services.
Alibaba, Amazon, and StarBucks are a few examples of companies that have already partnered with banks to offer traditional banking services such as credit and card payments. As the tech revolution goes into overdrive, expect more banks to collaborate with similar trusted brands to develop “lifestyle layers” to compete. If banks don’t leverage these capabilities, other brands will step in.
3. Regulations and the banks of the future
As banking operations change, so will banking regulations. Currently, the regulations in place are focused primarily on products. They are designed to protect banks and especially consumers from risks such as counterfeit currencies and exploitative products.
In the future, as consumers move from banknotes and coins to digital currencies and online banking, these regulations will evolve to protect financial institutions from new threats, chief among them cybercrime and unethical uses of technology.
Privacy, for example, remains a major sticking point. Technology provides financial institutions with a platform to reach and engage customers more efficiently. But, a few institutions are already abusing the new opportunity by selling or buying user data. New regulations, an excellent example being the recently instituted GDPR regulations in Europe, will focus on addressing these issues.
Many other challenges are expected in the areas of Big Data and the Internet of Things (IoT), with new regtech tools powered by Artificial Intelligence (AI) to help regulators deal with any threats. AI allows regulators to quickly share information across local and international boundaries to combat financial crimes.
4. Technology as the Driving Factor
Finally, technology will play a starring role in the evolution of the banking sector. According to the KPMG report, six key technologies expected to spearhead the revolution are; AI (especially Machine Learning (ML)), Distributed Ledger Technology (DLT), 5G Computing, Cloud Computing, and the Internet of Things (IoT).
Of the six, AI could have the biggest impact. In fact, a few experts predict it could replace as many as 1.2 million jobs in retail banks. These figures may be exaggerated (or not), but you never know, given the incredible potential of AI.
Through speech recognition, for instance, AI allows bank customers to withdraw money more securely. AI also allows customers to open bank accounts through voice and engage bank customer support through chatbots.
Other anticipated roles of AI in the future bank include automated upsells and cross-sells, robot advisors, automated assessment of customer risk, and improving customer experience. In the end, AI reduces operating expenses (by 22%), increases sales conversions (by 30%), and boosts revenue (by 34%).
Lessons from Today’s Best Banking Institutions
Unsurprisingly, the world’s best banking institutions are already implementing some of these futuristic technologies. The following are highlights from market leaders, ING Direct and Citigroup.
Inside the All-Digital ING Direct
A pioneer in digital banking, Dutch-based ING’s foray into digital banking started around 1997 with the establishment of ING Direct. Today, while the lender is a popular conventional bank in Poland and the native Netherlands, with several physical branches, it is an entirely web-based bank in at least three countries; Australia, Germany, and Spain.
ING currently focuses on just one thing – meeting changing consumer needs. According to the bank’s CEO Ralph Hamers, more and more customers are using their smartphones to pay for purchases and using payment service providers outside the banking sector. These are the customers they want to reach.
“We are focusing almost all of our investments on improving mobile banking,” he says. “We’re equipping our IT processes to handle more real-time transactions and make our banking more adviser-based and user-friendly.”
Hamers admits that banks may ultimately see more business going elsewhere in the future. He is particularly concerned that digital currencies, such as Bitcoin, are pulling consumers away from current money and banking systems.
ING is responding to this threat by fully embracing the digital revolution. Currently, the bank has 47 million customers served by some 75,000 staff members. But, most of their physical branches are merely advisory centers. Pretty much all of their services are now accessible online.
According to Hamers, they use Big Data to decide how much people can afford to repay each month and spot when a customer first starts getting into financial problems so they can offer the right solutions at that early stage. One of ING’s subsidiaries, DiBa (also the third biggest bank in Germany), currently adds half a million new direct banking customers yearly.
Omni-Channel Banking at ING
One of ING’s latest offerings, InsideBusiness, gives a glimpse into how the banking institution plans to evolve into the ultimate future bank.
InsideBusiness is an Omni-Channel banking strategy designed to provide NIG’s corporate clients, especially mid-corporates that bank with them, a single point of access to all the services and products they need. These resources include real-time overviews, self-service, features, re-pricing, customized reporting, and rollover services.
As you can see, these services are customer-centric rather than product-focused. It’s also a shift from previous business models where different customer needs were met on different applications. Back then, a foreign exchange would happen on one platform, account opening on another, and trade finance on a separate platform.
Omni-channel banking, a likely hallmark of future banking, brings all those offers in one place for easy access and improved customer experiences.
According to an ING Bank spokesperson, clients are asking for uniformity and simplicity. They also want real-time connectivity and anytime, anywhere services. Above all, they want to be able to do most banking on their own. Omni-channel banking makes all this a possibility.
ING currently processes 4.5 billion digital contacts yearly, according to Aris Bogdaneris, the group’s head of Challengers and Growth Markets.
Digital Banking at Citigroup
The other bank making huge strides in the digital revolution is Citigroup. Their approach has been a little different from ING’s. However, the goal remains the same – to achieve digital transformation within the shortest time possible.
The digitization started around 2015 when Citi set up a digital lab for start-up innovations and powerful new smartphone apps. Simultaneously, the company was also working internally to expand capabilities across big data, cloud computing, and AI analytics that enable automation and machine learning.
This FinTech angle has propelled the bank to where it is today and the primary factor shaping its future.
But, it wasn’t an all-rosy process. Citi first jumped into FinTech in 2016 when Stephen Bird was appointed head of the group’s consumer banking business. Two weeks after his appointment, Bird was on a flight to Silicon Valley. His mission? To meet venture capitalist Marc Andreessen and other tech luminaries to gain ideas on how to tackle the FinTech threat.
His biggest takeaways came from a chat with Salesforce CEO Marc Benioff. Benioff believed that Citi didn’t need to change their culture of operations all at once. With more than $1.8 trillion in assets, it would be too expensive, nigh impossible.
Instead, he opined that the bank needed to create an elite group that would operate with start-up like speed and agility. That’s where the idea of Citi FinTech originated.
Citi FinTech is made up of about 40 employees handpicked from various parts of Citigroup, and some poached from tech giants such as Amazon and PayPal. To maintain an outsider (start-up) mentality, the project isn’t based at the bank’s Manhattan headquarters. Instead, it resides across the East River in Queens.
On one wall of the new office, there’s a chart of Citi’s FinTech competitors. These include financial lenders, wealth managers, and payment companies, among others.
Bird’s first task was to work on rapid prototyping, which involved working on projects in two-week cycles. Within ten months, he had delivered Citi’s first mobile banking app.
From mobile app to AliPay, WeChat, and More
After launching their own FinTech “start-up,” it was only going to be a matter of time before Citigroup ventured into partnerships with other FinTechs. The first such partnership was sealed one year later when Citi announced a collaboration with Alipay.
AliPay is the most popular e-wallet service in Asia. In China, millions of payment transactions are processed using AliPay daily. Consumers use the e-wallet to check-out at stores, online, and transfer money.
It works by allowing users to store their debit or credit card details to the AliPay app and then use their mobile devices to make payments instead of using cash or cards. Close to two-thirds of Citi’s customer payments are now processed in this manner.
All a new user needs to do is download the AliPay app on their phones and create an account (for free). Then, they’re asked to verify their identities and bank information, and that’s it! They can begin using the service to download and buy prepaid credit cards.
Citibank is banking on this partnership to process payments faster and more conveniently. But that’s not all. They’re also leveraging the sharp rise and current popularity to remain relevant as we cross over to the digital future.
“Adapt or Die”
According to Bird, it’s a Darwinian “fight for your life” moment for traditional banks, an “extinction phase,” so to say. What happens in an extinction phase is that there’s new, fierce competition, and you either rapidly adapt or move over.
A few banks won’t survive the tide. Many are already struggling to remain relevant, let alone scale. As technology takes a firm grip on the economy, things will only worsen for these banks. FinTechs will step in and offer the unique, customized services banking consumers yearn for, and the rest will be history.
The good news is that many of the big banks aren’t taking the challenge lying down. They are prepared to fight and even share the spoils where they can’t win. It’s why you’re seeing the likes of ING and HSBC adopting customer-centric omnichannel strategies. It’s also why forward-thinking financial institutions are partnering with traditionally non-finance brands such as WeChat and Google to offer payment services.
Expect many similar trends in the next 10 to 20 years as the traditional banking sector fights for its life.
