Financial Technology (Part 3)
The banking sector is vulnerable to disruption, partly as a result of recent history. Millenial Disruption Index report found that 73% of respondents (teens to mid-thirties) would be much more excited about a new financial services delivered by Google or Apple than one announced by their incumbent bank. Traditional financial service providers are at risk. While individuals and businesses will always need banking services, will they still need banks?
Retail banks provide three crucial functions :
- They take deposits and provide customers with a secure place to store cash and earn interest, backed by deposit insurance and significant regulation.
- They facilitate payments through a range of systems, including cash, cards, and transfers.
- They lend money.
To a financial services agnostic the same services can be provided by the new generation of technology-driven challengers. Money can be deposited with challenger banks, placed in pre-paid cards, stored in PayPal accounts, invested in bitcoins, or invested through P2P lending sites. Credit is available from challenger banks and alternative lender (including P2P), and customers have an increasing choice of payment options, including PayPal, e-wallets, and phone-based systems.
The major risk for the incumbents is that they come to be perceived as utilities that do little more than supply the infrastructure while the FinTech companies take the credit for providing innovative consumer-friendly services – and ultimately own the customer relationship. Unlike the major banks who are often constrained by legacy IT systems and operating models, the new players have designed their digital services from the ground up to meet the needs of specific customer groups. FinTech challengers can be both agile and completely focused on positive customer outcomes.
In the future, we have logged into our mobile bank (presumably using heart biometrics or face recognition), and we will be able to borrow money using P2P (eq: via Ratesetter), make an international payment using Transferwise, top up our Starbucks e-wallet, or make deposit into my Alibaba money market fund.In order to achieve such a goal, collaboration will have to become the norm. The bank of the future could be a place to deposit not just our money, but other valuables – for example our medical records, our will, or the biometric data used to start our car. Banks are in an ideal position to create holistic customer solutions that combine financial services with a wider range of digital offers. It could be the key to their future prosperity.