The Banking sector moves beyond Banks
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The Banking sector moves beyond Banks

New to market players are eyeing up banks’ traditional markets, while other players are splitting the sector at the seams.

“Being attractive to consumers who are moving away from the traditional idea of a bank and now use their mobile phone as their main tool is an important and substantial shift.”

 

The emergence of new technologies has shaken the banking sector. Financial entities are finding it hard to weather the cultural change brought about by this, and hard to start the transition to a less rigid paradigm which is more open to innovation. One of the problems is that their expectations, in terms of accessibility and reliability, are much greater than those of any other digital organisation. This makes them mismatched soulmates for FinTech firms, with their agile, informal ‘open standards’ approach to developing and sharing platforms.

 

Improved customer experience has become an obsession across the industry, after traditional banks reluctantly and belatedly accepted that the case for such a change in focus is compelling, and that they themselves are compelled to change. Being attractive to consumers who are moving away from the traditional idea of a bank and now use their mobile phone as their main tool is an important and substantial shift.

 

Until now, banks have had an advantage over other players. However, the approval of the new European Payment Services Directive (PSD2) gave third party payment service providers access to the bank accounts they service, thus allowing them to offer their services via bank infrastructure. This was a seismic shift, seeing as it obliged banks to seek new sources of value in their relationship with other players in the sector. Unsurprisingly, this has been warmly received by new players in the market and far less so by traditional players with more to lose.

 

This new backdrop has led to new challenges. In the medium-term, the cycles for the implementation of new technologies will be much shorter. Banks are good at suggesting how the processes should be, but the hierarchy of their organisation takes away their agility in executing new developments and in being open enough to carry out collaborative projects with other partners. In the long-term, the ‘technology debt’ of their legacy systems is causing the difficulty in making changes with the required speed. Security concerns relating to new or non-standard technologies are two of their biggest challenges moving forward. The flexibility of FinTechs enables them to work more efficiently, to be quicker and to innovate more. However, the ‘trust-based’ environment from which they have emerged is yet to be fully tested at scale in financial services.

 

In this competition, banks should bring their strengths to the table. One of the key fields of competition is distribution; the channels through which banks connect with their clients. Traditional players must benefit from their experience in relationship management by understanding the needs of their clients, or using the trust they build from clients or risk management programmes to compensate for the shortcomings of FinTechs. They must recognise that they can create greater value than new, inexperienced players with less mature relationships.

 

One field in which banks lost some of their market position (which they later recovered) is that of payments. Eight years ago, other competitors started to take the lead and this meant that these entities began to receive the support of large payment processors. this then spurred on technology companies to search for solutions which would cause them to be left behind. Traditional banks have ceased to be the sole participants in this field but they have learned to work alongside the other firms more effectively. They have also developed better collaboration models, in the payments processing world in particular. Witness the launch of ApplePay, and collaboration around e-wallets as evidence here. PayPal is also both a disruptor and collaborator, and is now ubiquitous.

 

In SMEs, FinTechs found credit orphans, created by the regulatory pressure which fell on the banking sector. This is a challenging opportunity not only on a technical level, but also due to the traditional model for managing these clients and culture. This segment potentially offers greater opportunity for disruption due to the lack of competition to date, and the drift between what traditional banks offer and the experience offered in other sectors such as vehicle leasing and travel services.

 

A promising example in the UK is Mondo bank, which offers new entrants to the country a route to a quick, low-risk, limited functionality bank account without the traditional delays and issues due to a lack of credit history. With immigration high in both volume and on political agendas, this could prove to be a shrewd move in attracting lifetime customer value in a growth segment. Experiences logged by the World Economic Forum show that, for example, the Bank of China revamped its internal process to streamline the granting of loans, even to within four working days. Previously, ten management layers were involved in the same loan granting processes. Now there are only four. The pressure has begun to show, and we are starting to see benefits for consumers at last.

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