What does the future hold for banks?

Niel Bester|20 September 2018
What does the future hold for banks?

Banks shouldn’t view the imminent battle for consumer data as a foregone defeat – in fact, helping consumers manage their data securely presents a significant opportunity for banks.

For over three centuries, traditional banks have enjoyed a monopoly on financial services. With the emergence of the digital age, that monopoly has extended to the curatorship of banking customers’ sensitive personal information – a commodity that is now almost as valuable as the money banks hold. The world is becoming increasingly aware of the potential of customer data, which banks – since they already have access to that data – will certainly take full advantage of. Yet the fact that data, and not just actual money, holds real power today is making banks vulnerable to competition in a way no one could have foreseen even 50 years ago.

With the proliferation of digital-only banks, it may seem that they are presenting a significant threat to banks. By all accounts, they do: they offer features and services that appeal greatly to consumers, especially the millennial generation and younger, and they are far better positioned to respond quickly to rapidly changing consumer demands. Banks are often unable to offer these consumer-friendly, mass-appeal products as swiftly because of their existing legacy infrastructures – a factor that makes them vulnerable in a highly changeable fintech landscape.

Disruptors like DBS digibank in India and N26 from Germany offer paperless account opening, and Atom Bank and Monzo in the UK, with no branch networks to maintain, keep their fees extremely low. These benefits will undoubtedly win over many customers from traditional banks, further cementing the evidence of an undeniable shift in the financial services industry. In addition, banks will likely see their income from standard fees (such as ATM withdrawals, account fees, Internet banking service, etc.) drop – or disappear altogether – as competition in the banking industry mounts.

However, the true threat to banks is the loss of their data monopoly, and it’s coming from an unlikely source: the tech giants, primarily Google, Apple, and Amazon. With their presence increasingly prominent in all aspects of our lives – from communication, to shopping, to entertainment – these companies have become trusted, and more importantly, liked. Their users don’t hesitate to store information (documents, media, photographs) with them. This may not sound like a direct threat to banks, but considering how quickly 127 million Apple users adopted Apple Pay, it’s certainly a factor banks can’t afford to ignore.

In fact, contactless and cashless payments have recently overtaken cash use for the first time in the UK. According to the BBC, cash is now used in less than one in five transactions in stores. On London transport routes, cash has been all but banned. This is a trend that looks likely to continue, and we will see more players enter this space to rival traditional banks.

When it comes to payments, it’s not the fees that banks will miss out on: once again, it’s the data. If the bank isn’t involved in a user’s payment activities, it’s impossible for them to know what the user spends their money on, and will probably spend on in future. A bank that is unable to reliably predict its customers’ needs and meet these with specific revenue-generating products like loans, mortgages, investment instruments, will not survive for long in this fast-changing world. If a tech giant like Google or a nimble fintech startup can access consumers’ bank account histories, they can use that information as a basis for targeted advertisements, recommendations, and special offers. This can quickly escalate into a scenario where there will be hardly any room left for financial institutions – much less ones that have historically exploited their customers’ ignorance, taking advantage of being able to charge for habitual services like withdrawing cash.

Trusted but not liked

This year’s Edelman Trust Monitor, a well-established survey of trust among consumers in 28 countries, recently revealed that financial services are currently the least trusted industry sector, whereas the technology sector has the most consumer trust. This led financial commentator Chris Skinner to suggest that what the Trust Monitor is measuring is not trust, but likeability – in other words, what the respondents are saying is that they like tech firms the most and banks the least.

It seems clear that most consumers think Google and Amazon are great – it’s evident in the rapid uptake of their services and their booming customer base – but does this mean that they would trust the internet giants with their money? Banks are still the organizations that people trust to look after their money – most people just don’t like the way they have been doing it. Banks have long been perceived to take advantage of their customers, charging unnecessary fees for anything they can and making exorbitant profits. Widespread dissatisfaction with this longstanding status-quo is on the rise, and banks can no longer afford to ignore this.

To secure their place in the future, banks will need to get rid of this negative image and recast themselves as institutions that aim to safeguard their customers’ financial interests; a kind of protective older brother to the consumer. Banks shouldn’t view the imminent battle for consumer data as a foregone defeat – in fact, helping consumers manage their data securely presents a significant opportunity for banks. For example, they could step in as a federated identity provider. After all, using your bank credentials to log into Facebook would make it a lot more difficult for a third party to take over your account with a simple password reset after hacking your email account.

For banks to successfully utilize this opportunity, they must offer engaging apps that do more than just balance checks and transfers. There is nothing captivating about a bank that simply provides a straightforward online banking platform. Instead, banking apps should be microcosms of personal financial management, where the user goes to see their budget, spending patterns or credit score; to apply for loans or new accounts; to invest in the money market, cryptocurrency, equities, or stocks. Banks will have to become relevant to their customers’ lives by providing slick, rewarding digital experiences that meet their changing needs. They need to create products that play a meaningful role in the daily lives of their users, and help them achieve their goals. Frequent interaction with these products will enable banking users to better understand where their money is going, and to avoid overdrafts and late payment fees. If banks can pull this off, they’ll offer a unique user journey that even the tech giants would have a hard time rivalling.

Originally published in The European Financial Review.

About the author

Niel Bester

Niel Bester

SVP products

An engineer by training, Niel has decades of experience in most facets of software development within the telecommunications and IT industries. He is passionate about product and organizational strategy and, in a company bursting with ideas, it’s his job to flesh them out and feed them into our products roadmap.

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