Being ‘omnipresent’ and making the most of different channels means banks can yet fend off Amazon and Apple in financial services
There’s a pervasive fear that a number of new “disruptors” are going to Balkanise the financial services market in coming years, eating into banks’ traditional revenue and profit sources.
The second annual survey of retail banks, released 10th March 2015, conducted by The Economist Intelligence Unit (EIU), on behalf of Temenos, might reinforce that sentiment. It found that 35% of the 200-plus senior bankers surveyed thought new entrants and competitors would have a major effect on the market in the next five years. That figure rose to 52% in North America.
Over one third believed that the biggest threat would come from tech and e-commerce giants like Apple and Amazon. They are disruptors by nature and experts at exploiting customer data and extracting additional retail dollars.
The newcomers, with deep pockets and the best IT platforms and skills, will certainly want to nibble at certain profitable dishes. But banks should be confident that they can remain at the head of the table if they respond in a smart and measured way, making the most of their inherent strength in data and forging new strategies for different channels.
The survey forecasts that the disruptors will grab market share from current accounts (24%), deposits (14%) and savings lines (25%). Electronic wallets and foreign exchange and remittances are merely the start. Of course, we’ve already seen that happening with Amazon Payments, Apple Pay, Google Wallet, PayPal, Samsung Wallet and so on.
The advantage for the likes of Apple is that their customer data is already refined, meaning they know client preferences and can target relevant offers. Most Apple users have long abandoned fears of surrendering data in exchange for convenient service and quality products.
Facebook is also well placed to take advantage of its huge potential customer base, already corralled inside its ecosystem and likely to stay there for the free services that are put to daily use.
The disruptors might next consider targeting the “underbanked” market. This refers broadly to those digitally savvy consumers who have less trust of traditional financial institutions and a view of banking that differs greatly from their predecessors. They are young now, but will be tomorrow’s financial decision makers.
Already, the “underbanked” conduct some of their financial transactions outside the mainstream banking system. According to one KPMG study from a few years back the “underserved” segment represented more than 88 million individuals and nearly $1.3 trillion in wages in the United States.
It’s important though not to overstate the overall trend. We’ve seen a number of false dawns before, for example mobile banking was apparently poised to dominate the market around the turn of millennium.
To be clear, banks retain inherent strengths. Clearly, the tech newcomers don’t have the local networks, the spending and savings data, the Basel-compliant capital buffers or the regulatory structures to wholeheartedly enter the universe of universal banks.
And banks are still in a great position to respond digitally. In the US, about 90% of retail banking transactions now occur online or via mobile. Banks can easily get to know their customers better by mining this data.
To do that, they will need to become omni-present and place themselves where the consumer is online, while also developing channels, allowing them to track customers better and communicate with them in a timely and relevant way. The banks can leverage their data via personal financial management and create new data-driven services like digital passports, digital vaults and digital wallets.
The survey showed that some banks are starting to think this way. For example, BNP Paribas Fortis, KBC, ING and Belfius have set up Belgian Mobile Wallet, operating as Sixdots. Wells Fargo and Standard Bank have created their own labs to test new technology and apps. And the Spanish bank BBVA acquired the Big Data firm Madiva and the digital bank Simple.
Or take ICICI Bank in India, which has launched Pockets, an app-based digital wallet which, on installation, generates a virtual Visa card that can be used for payments with numerous online merchants. Pockets also offers the option of a physical card.
The next step would be for banks to better use the data, for example by deploying real-time, tailored marketing or guidance that offers the right product at the right time, whether that’s services, products or financial advice.
In the future there are likely to be two main types of banks: those that provide core banking transactions will compete on scale and cost and be happy for others to manage and own customer relationships; others will focus on customer relationships – they differentiate themselves via experience and intimacy with new uses of data and online channels, moving away from the previous model of interaction via branches and call centres.
Facing up to IT 