Monday, October 18, 2021
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The Future of Banking

It’s almost impossible to imagine a world without banks. They show up in practically every important activity in our lives, and yet a horizon where traditional banks become obsolete is starting to take shape. In this video Futurist Chris Crespo discusses three trends that will make the 2030 banking landscape, unrecognisable.

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The following is a trasncript of the video above.

No one likes banks. They are slow, they are unintuitive, and their business model is based on stitching customers with unpredictable fees, penalties and commissions. 

The banking business model has remained practically unchanged for 500 years.

As soon as people started depositing money in banks, bankers realised that it was unlikely that everyone would want their money back at the same time, so they started lending it out to borrowers for a fee.

In its simplest form, The bank borrows money from Jane to lend to Jack, and hope that Jack will pay them back fully before Jane asks for her money back. In the process, the bank charges Jack a bit of interest plus some fees, and discourages Jane from asking for all her money back at once, by limiting the amount of money she can access in one go and charging her penalties if she does.

For most of us, it has become difficult to see the real value that banks provide. If you are anything like me, you probably see them as the slightly awkward uncle who you have to invite, even if you don’t want to, to important life events like weddings, the birth of your first child, or the purchase of your first home. But banks are also there when we buy groceries, when we get paid and when we travel.

As much as we may dislike them, Banks play an important role in helping us transact with each other, and in fuelling growth and innovation through loans and credit.

Like every other industry, banking is changing exponentially. In the past 10 years, it has changed more than it has in the last 100 years.  We don’t even have to go that far, as late as the 1980’s Banking was still mostly carried out on paper ledgers where clerks would manually enter a record of deposits and loans.

But unlike industries like media or travel, banking has resisted from fully giving into transformation.

As someone who has worked for a bank I can say that the level of trust, responsibility and regulation that is placed on banks has made CEOs cautious to change.

And this is largely because bosses are strongly encouraged by shareholders to focus on the risk part and not on the opportunity part of the business,  a very real example of the cognitive phenomena of loss aversion.

For a long time, banks have defended their position with phrases like: We’re ok, We have the customer trust. Interestingly, customers seem to disagree, in previous videos, I have shown you the following a survey done by the British Firm Ipsos Mori in 2018, in which 52% out of 20,000 global respondents, said they believed their bank would take advantage of them if given the opportunity.

Banks have also been complacent on the idea that customers never switch banks “they are in fact more loyal to their banks than to their spouses”, some bankers say. Research by Accenture found that nearly one in five millennial customers in the United States switched banking providers in a 12-month period. This is almost double the one in ten 35–54 year olds who switched and six times higher than the rate of customer over 54 who switched.

For digital natives, switching banks is as easy as downloading a new app. And with an active consumer base that’s prepared to switch banks if they’re unhappy with a service,  there’s a market opportunity for new companies with strong technological capabilities, and strong value propositions.

This increasing competition means the traditional banks are facing a battle to remain relevant, especially to younger consumers.

Trying to make sense of all the changes is not so straightforward, and that’s because there are several trends developing at the same time. But for simplicity purpose let’s divide these trends into three: Open Banking, Neo Banks, and Super Apps. 

Open Banking

If we think of how large incumbent banks are responding to competition, one of the most disruptive trends, especially within the European banking system comes from Open Banking.  In Europe, the Payments Service Directive also known as PSD2 is a regulation issued by the European Commission that requires that  banks create digital interfaces for third parties to be able to access customer data, and even some of the functionality available through the bank’s core banking platforms. 

The purpose of these regulation is to make the European payments market more efficient and secure for customers. But also to level the playing field for new payment service providers.

The potential for disruption from Open Banking is enormous. By embracing Open Banking, banks are inviting a tsunami of competition to their door. This is of course hugely beneficial for customers who will have more choices for services that can make their financial lives more convenient. But for banks this means a change in the rules of the game. Banks who want to survive will have to make a choice. Either continue to bring financial products and services to a market with lower barriers for entry, and much higher specialisation. A market where they will have to compete for customers with faster, more cost efficient and possibly better value, digital new market players. Or, develop new business models where their main role will be to operate banking platforms that other banks and non-banks could use to securely and compliantly provide products and services to the market.

Think of it as a shopping centre, where the bank can either run the shopping centre where other shops sell products, or it can run a shop within the shopping centre itself. It’s unlikely that most banks will be able to manage both

Visas recent 1.8 billion euro acquisition of Swedish API company Tink hints towards a heated-up battle for control of future banking platforms. Because as we all know, in the platform wars, network effects means that the winner takes it all. 

NEO BANKS

The second trend that is reshaping banking is the emergence Neobanks.

Neobanks are challengers, that enter the market either servicing niche segments, or specialising in parts of the banking value chain. Take Revolut as an example. Revolut is a british bank that launched back in 2015 servicing the currency exchange needs for travellers. Today it has full banking licenses in several countries and as of June 2021 has over 15 million customers across 37 countries  and provides services like current accounts, business accounts, trading and investing.

The company Wise is a similar example. Wise started  as an Estonian/British company, operating with the name of Transferwise, disrupting the remittance and cross border payment market by slashing exchange and money transfer fees, reducing the time it took to complete transfers, to mere seconds.

Recently the company dropped the Transfer out of its name since it now offers more services including personal and business accounts 

Other neo-banks like N26, Monzo, Sterling and Lunar have followed similar trajectories and have established themselves as solid contenders in their different markets.

Stripe, a business-payment provider, is now valued at $95bn, making it the largest private tech company in America. Stripe’s success as a business platform suggests it is not just neobanks are also going after the but corporate banking segment. 

But, In-spite of all the welcome transformation a future in which banks will play an increasingly smaller role, or even none at all is starting to take shape, and this is because of the third trend, the emergence of the Super App.  

Super Apps

This trend has mainly been observed in Asian and emerging markets in Latin America where tech giants are using the competitive power of their platforms to offer customers more varied services.

Take for example tech apps like Grab in Singapore or Gojek in Indonesia. Both companies started as ride-sharing services and organically grew to enable low value—high repeatability services like food and grocery delivery, parcel delivery, etc.

Now, both companies are offering bank-like services like payments, micro-loans, and micro-investments, to people who had never had a bank account or a credit card, but that are fluent in the use of smartphones.

Most supper apps, cannot do everything a bank does, because they do not have a balance-sheet to sustain lending. A bank’s advantage lies in having deposits to lend out. Tech firms’ advantage is that thanks to their advanced algorithms and data processing capabilities, they know whom to lend money to. This has led some tech companies to decide they want a balance sheet too.

An example is Kakao Bank, the company that chose to make banking cute and in the process captured 6 % of the unsecured personal loan market in South Korea.  Kakao Bank is now South Korea’s biggest lender by market value with a valuation of 29 Billion USD, but it started back in 2010 as a messaging app called Kakao talk which today has a user base of over 45 million users in South Korea, a country of 52 million people.

If other technology companies took this path the you may not be getting your first mortgage through your bank.

In the horizon

According to market research firm Gartner, by 2030 80% of incumbent financial service firms will have either consolidated or run out of business. This means that we could potentially be looking at future with significantly less banks.

This is not to say that the need for banking services will disappear, if anything as more and more people can be serviced without a bank account, demand for consumer and business financial services will grow. 

In fact within the next 10 years we maybe looking at a future where information from your social media accounts, current account and even gaming profiles, will be used to create a unique profile to hyper-personalise your banking services.  Who may be the suppliers of those services, is probably a question for another video.

Chris Crespo
Chris Crespohttp://nordicfintechmagazine.com
Chris is the Co-founder of Fast Forward Banking, a Financial Media agency that seeks to bust the jargon out of banking. As a behavioural economist he enjoys exploring questions that challenge conventional thinking. He is fascinated with innovation and technology and its intersection with financial services, society, and culture. Chris is also a guest lecturer at Stanford University and Singularity University where he teaches regularly on the Future of Financial Services, the Future of Money and the Disruption of our current Banking and Monetary Systems.

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