Who moved my Bank?
In the last decade or so, the global financial services landscape has undergone many radical changes – mergers and acquisitions, government-backed takeovers and regulatory challenges,that have reshaped the competitive landscape. Rapidly advancing technology and changing consumer behavior have placed the future of the bank branch at significant risk.
Brett King stated in his book Bank 3.0 that ‘banking is no longer somewhere you go but something you do’. Data from recent research in the United States has also indicated that as many as half of all U.S. bank branches might disappear in the next decade.
Bank branches may soon become like fixed-line phones in many homes – even when they are present, they are rarely used. The implications for banks are worrying – will retail customers loose the link between ‘banking services’ and a ‘physical entity called a Bank’? And if they do, will they need a bank? Or will they interact with a platform which they have no physical connection to? It could be a Bank, a Financial Institution, a Social media channel or even an E-commerce platform.
Changing consumer behavior is one of the key drivers of change. People who have ‘grown up’ with the internet – digital natives – are extremely comfortable with virtual connections to companies and they tend to have low levels of brand loyalty. Their demands are forcing banks to rethink their business strategies and innovate continuously.
There are countless other trends that are shaping the future of finance and here’s a brief look at a few of them.
Peer-to-Peer (P2P) Lending, the Challenger:-
Shakespeare’s line from Hamlet “Neither borrower or a lender be” may have been the very opposite had he been born in the era of P2P lending. The P2P model allows consumers to easily borrow as well as lend from the comfort of their homes through a single online platform. The P2P lending industry is seeing significant growth, especially in the developed countries with strong financial markets. P2P lenders in the US generated $6.6 billion in loans last year, up 128%.
Since its inception in the UK in 2004, Zopa has now lent over GBP 1 billion. Some of the players in the space are Prosper and Lending Club. The P2P market is India is also growing fast with players such as LendenClub, i2ifunding.com, Lendbox, PeerLend and Faircent starting operations. Inspite of major regulatory challenges in China, P2P is trying to find its footing in the market. CreditEase is one of the leading P2P lenders in China.
Unencumbered by banks’ legacy infrastructures, P2P lenders have reinvented the lending model. Powered by technology, not only do these lenders offer much lower interest rates than banks but they also operate a more customer-friendly business model – often approving and disbursing funds in a matter of minutes. Despite some recent issues, it seems clear that the P2P lending model will continue to reshape financial services.
To address the challenge some banks are investing in P2P companies, others are developing the same capabilities for selected market niches. Banks do have some significant advantages including brand awareness and trust, but it remains to be seen if consumers will value those aspects more than they value a lower interest rate on their loan.
Online Market Places – offering endless choices: –
Online marketplaces and comparison shopping sites are spreading out and are now well entrenched in areas such as insurance and credit cards. While these marketplaces don’t immediately represent a competitive threat to the banks they do create significant challenges – ranging from the easy facilitation of comparison shopping (pricing pressure) and the increase of shopping cart abandonment to the gradual reduction in the brand awareness for banks.
In Africa, online marketplaces offer tremendous opportunities for African banks that have previously focused heavily on the oil and mineral economy. However, in the recent past, as the commodities market has slowed down, banks looking for growth from retail lending have turned to online marketplaces.
BankBazaar.com is the largest online marketplace for financial products in India with over 5 million unique visitors a month. The site helps consumers compare and apply for financial products from more than 50 financial institutions comprising the biggest nationalized and private banks, NBFCs, and insurance companies in India. Currently, more than 85 banks and insurers have partnered with BankBazaar for various financial products. In 2015, the biggest bank in India, the State Bank of India, also joined hands with BankBazaar to allow home loan borrowers to apply for SBI Home Loans through it.
Social Media Banking, the new channel on the Block: –
The statistics behind social media are staggering – Facebook has 1.71 billion active users, Twitter has 313 million users and WhatsApp has over a billion active users. Cumulatively 41% of the world’s population has been touched by social media. These numbers represent a tremendous opportunity for financial services.
Initially, banks were slow in recognizing the potential of social media, but now they are aggressively using this platform to offer services such as opening new accounts and transacting online. Social media offers banks the dual advantage of product marketing as well for enabling transactions.
Tikkie, an initiative of ABN AMRO, is a payment app that allows customers to send payment requests via WhatsApp. Tikkie can also be used by clients with a current account with any Dutch bank. The App processes requests through the familiar payment platform iDeal.
The Facebook Messenger platform opens many doors for easier, better digital interactions by enabling businesses to embed codes in chat conversations. Businesses can now obtain user messages, translate them into action requests, and send back automatically generated or manually-typed-by-human responses to the users. This is a faster, simpler, and richer experience than mobile app interactions, which require users to navigate through a mobile app, click on different links, load new pages, and wait for confirmation.
The Messenger platform will affect the banking industry significantly because most banking services are tasks that can be automated, and instructions can be provided in simple human language (e.g. “pay my Internet bill”). In fact it has been estimated that the use of robotic process automation can cut the cost of delivering financial services by 75%.
Needless to say social media offers tremendous opportunities – to the organizations that determine how best to use it.
Limitless Possibilities: E-commerce tie-ups with Banks: -
India’s largest public sector bank has announced the launch of SBI e-Smart SME to offer easy working capital to e-commerce players. The bank has initially tied up with e-commerce major Snapdeal to offer instant loans to its sellers. In one year, through its Capital Assist Program, Snapdeal had lent over $40 million to 1,000 sellers. This alliance is very significant because a large public sector bank, which is mostly known to be traditional, has partnered with a major player from a very different industry.
The RBI (Reserve Bank of India) has recognized this opportunity and is open to joint ventures between Banks and e-commerce companies. RBI deputy governor HR Khan spoke at the launch of the Suvidhaa pre-paid card, issued by Axis Bank in partnership with Suvidhaa Infoserve. “Banks will see there is competition and opportunity for cooperation as well with e-commerce firms,” Khan said. “We will have to see how we provide a platform between e-commerce and banks.”
The bottom line
For banks, the rapidly evolving financial services ecosystem is opening up opportunities to improve efficiency while simultaneously creating new competition. The common thread is that they are driven by changing customer behavior and they are supported by sophisticated technologies.
By implementing a digital strategy that improves customer experience, tackles costs through radical simplification and builds digital marketing capabilities, banks can unlock significant value and enhance their potential to grow.
In the future, the banks that are able to implement effective digital strategies will be also be able to incorporate data driven analytics in their decision making process. In addition to reducing risks, this will further enable the digitization of financial services.
However, to implement these strategies with agility, legacy organization structures will have to be replaced by leaner, more agile structures that can deliver results faster and more cost effectively.
To conclude, while customers need financial services they don’t necessarily need banks in their current form. The digitization of financial services presents challenges and opportunities to today’s market leaders.