Retail Banking – In Tech We Trust by The Economist Intelligence Unit
The digital revolution has moved from existential threat to potential survival strategy for the world’s retail banks.
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For the first time in three years, the post-crisis regulatory squeeze no longer tops our retail banking trends. Banks may not like the renewed regulatory focus on know-your-client and suitability, but they now have a more pressing draw on their resources: financial technology (fintech).
The Economist Intelligence Unit’s previous reports reflected a somewhat defensive attitude from incumbents about the rise of non-financial sector competitors. Times change quickly, however, and banks are risking their own existence if they choose to ignore the rise of smartphones and the proliferation of real-time, low-cost competitors.
The scale of disruption is unprecedented, across every market, every distribution channel and every single product line. Fintech poses a potentially fatal risk and will be a severe test of banks’ IT systems and their ability to respond to rapid changes in customer expectations, short product development times and growing cyber risks.
Discussions now center on just how quickly and how far transactional banking will be unbundled and margins slashed. Strategically, banks have a number of potential responses; the correct path is not yet clear-cut.
Some banks are building their own technological solutions, where resources allow. Others are buying the fintech upstarts outright, a quicker but increasingly expensive option to molly-coddling fintech hubs.
Partnering or opening up bank platforms to give third parties access to customers are two other strategies that are gaining ground. A European regulatory push would allow retailers and aggregators unhindered access to account information for client-approved payments and data-mining.
The question is who will survive the disruption. Trust and customer experience are at the heart of the battle; banks have the upper hand on the former, not on the latter.
Even if access to information is eased, tougher data protection and liability rules may delay the death of the banking laggards; customer apathy may buttress their market share for a few more years. Regulators will also have to stay ahead of the game, and will have to ensure that cyber crime does not become the next big global crisis.
In the meantime, why not let the fintechs burn cash experimenting with what works? In order for that strategy to work, bankers must ensure that they have the resources and architecture to embrace emerging channels, products and services quickly. Failure to do so will leave them as mere “dumb pipes”, providing the infrastructure for others, with few touchpoints to drive growth and higher-margin cross-selling.
To gauge the pace and extent of this revolution, The Economist Intelligence Unit surveyed 203 senior retail banking executives around the world about customer expectation, regulatory and technological developments. The key findings are as follows.
- The banking world of the future. By 2020 bankers expect the banking environment to be shaped strongly by technology and non-traditional competitors. They believe that retail peer-to-peer (P2P) lending will be available via banking platforms (65%); retail banking will be fully automated (64%); and more money will flow via fintech firms than traditional retail banks (57%).
- Profits face multiple attacks. Business models must adapt to survive. Individually, the “scare scores” attached to changing customer behaviour (22%), new entrants (26%) and new technology (24%) are significantly lower than in previous years; collectively, however, they still represent a significant threat.
- A multi-headed monster. That competitive threat will come from many quarters. Apple Pay and its ilk (20%) and other non-financials (20%) may yet emerge to really upset the traditional banking sector. As keen as regulators are to encourage competition, new banks are seen as less of a threat (16%). Robo-advisers could lure away more profitable wealthy (and the not-so-wealthy) clients (17%), and P2P lenders attract dissatisfied borrowers and savers (21%).
- Regulators still watching. The too-big-to-fail rules are almost complete, but there is still plenty to keep compliance departments busy. Regulators now have time to cast an eye over consumer protection issues, with product design and transparency (24%) and fines and recompense orders (19%) still in play.
- Banks are adapting. Bankers see three main areas that they must change in order to survive: adapting the role of the branch network (36%); getting the right talent (35%); and modernising their technology (31%). Banks still have the relationships and the data, but can they maintain and build on that advantage?
Retail Banking – Introduction: Now It Gets Serious
“Banks are being disintermediated. They are no longer fit for purpose, are doing too little for too much money for too few.” – Tony Craddock, Emerging Payments Association
A clearer picture is emerging of where the battle lines lie in the financial revolution that threatens traditional transaction and relationship banking models.
At the front-end, customers want quick, cheap, simple access to banking by any means they choose. But the smartphone cannot do it all; banks must be multi-channel. Branch, call centre, remote video, phone, PC and automated teller machine (ATM) must function as one. Right now, they often operate in separate silos.
Digitization could be a godsend, lowering costs and upping functionality for bank and customer. However, it is also the biggest threat; new transaction services may have already fatally wounded existing national and international payment architectures. Blockchain distributed ledger networks (as opposed to pseudo-currency bitcoin) could be what finally kills them off.
“Paytech” is where the big money is being invested. Card, contactless and e-wallet payments have largely rendered cash obsolete in Denmark and Norway. With cash declining, in-branch human interface is rarer with every passing day. High-margin lines are also being squeezed. Robo-advice is front-page news, with cheap, functional, index-tracking model portfolios and fancy rebalancing tools. Hefty bank adviser and wealth unit fees will not last as consumers come to realize that they are paying a lot for fund managers who largely fail to deliver.
If there is a bright side for banks, it could be that P2P lenders and robo-advisers may struggle to establish harmonized global franchises. Their business models are easily copied; local credit, tax and advice law is harder to assimilate. Both markets may remain fragmented.
“Regtech” is the next battleground. Overseeing this wave of new technology is fast replacing post-crisis measures on the regulatory to-do list. Cyber security is a genuine threat to the trust that billions of customers place in their banks, apps and e-wallets. Whatever their faults, banks do take compliance and security seriously; fintechs typically focus more on customer experience. If the traditional players can maintain their hold on keeping their customers’ money safe, system integrity may also be the key to securing the future role of the traditional bank.
Section One – The Future Is Here
“The payments battle is over” – Nadeem Shaikh, Anthemis Group
The problem with innovation is that it is unpredictable in terms of timing, scale and consequence. Yet our respondents make bold predictions about how the traditional banking business model will look in five years’ time.
Modern banking has not changed much since the moneylenders of Renaissance Italy employed a trust-based system to move money from one merchant to another for a hefty fee. That transaction model is the basis for relationship banking, the high-profit lines on which bankers rely.
Digitization is driving major transformation, rewriting the model as customer expectations change. The touchpoints of branch footfall and human interaction are in rapid retreat. Banks hope that the role of the branch will shift from cash-handling to that of providing value-added financial advice.
Denmark’s Jyske Bank will have no teller desks by the end of this year. Branch numbers have fallen to 97; they may dip further. The challenge is how the bank stays close and relevant to customers who no longer visit branches regularly, says Jyske’s network head, Ivan Stendal Hansen.
“With self-servicing, the number of branches will continue to reduce. However, financial advisers still need to be in the local environment for bigger financial decisions,” he says. Mobile banking can even counter declining footfall. At Bank of America, clients are now scheduling as many as 18,000 adviser appointments per week via a phone app.
“They want someone to talk to, more advice and guidance on how to make their financial life better,” says Michelle Moore, head of digital banking.
Cash is expensive to manufacture, sort and distribute – for banks as well as customers. It is also potentially dangerous. The head of Norway’s DNB recently pointed out that if you get rid of cash, criminals stop targeting your branches. It is inconvenient, too. That is why early adopters of M-Pesa, the ubiquitous Kenyan mobile money network, quickly learned that their phones could store and pass money to friends, not just pay their bills.
While Asia, Africa and Latin America remain more cash dependent than Europe and the US, the demise of cash may be speedier than in developed markets. Some 62% of Asia Pacific respondents say that cash will represent fewer than 5% of transactions by 2020.
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