Technology-led disruption in the banking sector
Having recently attended the annual SIBOS conference, held in London this year, and last week’s PayExpo, I found the messaging from both events resoundingly clear. “There is a big gap between today’s banking reality and the expectations of customers in the digital economy” (Tony McLaughlin, Emerging Payments & Business development at Citi). The future of digital banking looks bright and is set to see a technology-led transformation that is moving at such a breakneck pace that is likely to change the very nature of banking forever.
The after-effects of the 2008 global financial crisis culminated in an erosion of trust in the banking system and a decline in credit available to both businesses and consumers. Many of the incumbent banks which still remain battered and bruised, have quickly come to the realisation that in order to survive and remain profitable in this new era they must think in terms of “networked value creation.” Recent legislation in the EU which was implemented to punish the banks such as the General Data Protection Regulation (GDPR) and Second Payments Service Directive (PSD2) has had profound implications that has resulted in banks adopting concepts from the tech world. The first of these is that banks must now build ecosystem platforms, which means that they have to move away from traditional relationship banking. Secondly, banks must design interoperable services that can be distributed through other value ecosystems.
I was shocked to read that in September 2019, Germany’s hot online banking startup, N26, hit the one-million-customer mark in France. The online bank launched in France in 2017 and has now surpassed HSBC’s approximately nine hundred thousand customers (as of HSBC’s 2018 report). Unlike traditional banks that target all customer segments, fintechs do not hesitate to focus on strategic priority segments and develop offers accordingly. Millennial customers, a top target for both traditional and fintech companies, have been heavily influenced by the ease of technology in most aspects of their lives. When it comes to banking, their expectations are just as high; low fees or no-fees banking and excellent customer service are just a couple of their challenging demands.
The tipping point where the number of traditional bank customers that still visit a bank branch will be outnumbered by mobile app users will come in 2021 with over two-thirds of British adults using online banking as reported in 2018. This sharp rise has led many bank branches to close their doors with two-thirds being closed over the last 30 years. There are those that still prefer to visit a physical bank but the rise of phone, internet and mobile account solutions have drastically reduced the number of people making the visit.
The banking sector currently exploits technological advances through the use of open application programming interfaces (API) and other enterprise software tools, such as artificial intelligence, machine learning, deep learning, and robotic process automation. The usefulness of API for data dissemination presents an exciting opportunity for greater financial inclusion. APIs are fast becoming the standard by which banks, companies and systems exchange data, enhance customer experience, and deliver value-added services. No longer is digital communication between banks and their clients limited to scheduled, point-to-point connections. Instead, banks can connect their processes, services, content and data directly into clients’ business systems. Clients can then consume products and services in new ways, imbedding these services into their own ecosystems.
No one knows what the future of business banking will look like, what seems fairly certain is that the disruption in the banking sector will continue. Banks and fintechs that that can transform themselves into truly effective digital organizations and embrace the changes in digital technologies and consumer behavior, will not only survive but also thrive in both the current and future digital environments. Banks unprepared should consider the famous quotation from Bill Gates: “We need banking, but we don’t need banks.”