There\u2019s 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.<\/p>\n
The Global Banking and Finance Review is one such peer review platform that\u2019s warning banks to \u201creinvent or die.\u201d 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.<\/p>\n
He asks a simple question \u2013 how do you make payments at the store these days? What about money transfer? Do you need to go to the bank anymore?<\/p>\n
For most people, it\u2019s 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.<\/p>\n
The follow-up question then becomes \u2013 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.<\/p>\n
Sam Stewart, a Boston Consulting Group (BCG) partner and co-author of the recent BCG report;\u00a0Global Retail Banking 2019: The Race for Relevance and Scale,<\/a> is another expert who believes that times are changing and banks must too.<\/p>\n \u201cCustomer behaviors are shifting. The majority of consumers now want banking capabilities embedded in their daily lives,\u201d he says. \u201cThe combination of these expectations and tech-enabled solutions could rob traditional banks of their inherent advantages.\u201d<\/p>\n According to S&P Global authors<\/a>, Stuart Plesser, Devi Aurora, and Brendan Browne, it\u2019s an especially tough time for \u201csmaller banks and community banking systems\u201d without the resources to compete on a digital front.<\/p>\n Financial Technology companies (aka FinTechs), which seek to capitalize on the interplay between conventional banking systems and technology, are particularly a huge threat.<\/p>\n 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.<\/p>\n 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<\/a> management. One third use these financial applications daily while about two thirds (69%) use them once a week.<\/p>\n Aside from the exceptional convenience, reach is another factor that gives FinTechs a massive edge. Approximately 1.7 billion people globally don\u2019t 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.<\/p>\n KPMG\u2019s recent report,\u00a0The Future of Digital Banking<\/a>, attempts to explain how the confluence of changing consumer preferences and the emergence of FinTechs will shape future banks.<\/p>\n In the report, KPMG foresees a future where banks completely embrace technology, resulting in a banking landscape that\u2019s \u201cfar more competitive, efficient, and innovative in delivering \u2018autonomous experiences.\u2019\u201d<\/p>\n 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.<\/p>\n Four key factors will be at the heart of the revolution; data, business models, regulations, and technology.<\/p>\n 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.<\/p>\n Unfortunately, up to now, banks have had to deal with damaging trust issues. Many people aren\u2019t yet at the point where they can fully trust banks and other financial institutions with their personal information.<\/p>\n This scenario won\u2019t 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\u2019s nothing to fear.<\/p>\n It\u2019s also plausible that trust becomes a key differentiator and key value proposition among financial services providers. If consumers can\u2019t trust you, they\u2019ll go to someone they can trust.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n The prediction is that banks will \u201cre-bundle\u201d 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.<\/p>\n 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 \u201clifestyle layers\u201d to compete. If banks don\u2019t leverage these capabilities, other brands will step in.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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<\/a>, will focus on addressing these issues.<\/p>\n Many other challenges are expected in the areas of Big Data and the Internet of Things (IoT), with new\u00a0regtech\u00a0tools 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.<\/p>\n 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).<\/p>\n 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.<\/p>\n 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.<\/p>\n 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%).<\/p>\n Unsurprisingly, the world\u2019s best banking institutions are already implementing some of these futuristic technologies. The following are highlights from market leaders, ING Direct and Citigroup.<\/p>\n A pioneer in digital banking, Dutch-based ING\u2019s 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.<\/p>\n ING currently focuses on just one thing \u2013 meeting changing consumer needs. According to the bank\u2019s CEO Ralph Hamers<\/a>, 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.<\/p>\n \u201cWe are focusing almost all of our investments on improving mobile banking,\u201d he says. \u201cWe\u2019re equipping our IT processes to handle more real-time transactions and make our banking more adviser-based and user-friendly.\u201d<\/p>\n 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.<\/p>\n 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.<\/p>\n 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\u2019s subsidiaries, DiBa (also the third biggest bank in Germany), currently adds half a million new direct banking customers yearly.<\/p>\n One of ING\u2019s latest offerings, InsideBusiness, gives a glimpse into how the banking institution plans to evolve into the ultimate future bank.<\/p>\n InsideBusiness is an\u00a0Omni-Channel banking\u00a0<\/a>strategy designed to provide NIG\u2019s 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.<\/p>\n As you can see, these services are customer-centric rather than product-focused. It\u2019s 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.<\/p>\n Omni-channel banking, a likely hallmark of future banking, brings all those offers in one place for easy access and improved customer experiences.<\/p>\n 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.<\/p>\nFinTechs; the Main Threat<\/strong><\/h2>\n
Factors to Shape Future Banking<\/strong><\/h2>\n
1. Data at the heart of banking activities\u00a0<\/strong><\/h3>\n
2. Different, more customer-centric business models<\/strong><\/h3>\n
3. Regulations and the banks of the future\u00a0<\/strong><\/h3>\n
4. Technology as the Driving Factor\u00a0<\/strong><\/h3>\n
Lessons from Today\u2019s Best Banking Institutions<\/strong><\/h4>\n
Inside the All-Digital ING Direct<\/strong><\/h3>\n
Omni-Channel Banking at ING<\/strong><\/h4>\n