When is a bank not a bank?
Our latest Insight report, Ten Things Digital Teams Should be Doing in 2016, reviews the digital trends that banks should currently be exploring. Here the author, Jess Morley, explains the threat that traditional retail banks face from digital disruptors and explains why this actually presents them with an opportunity to re-establish their relevancy.
- The dominance of traditional retail banks over the market has remained largely unchallenged for the last two centuries.
- As increasing numbers of digital disrupters enter the space, this is beginning to change.
- Fintech challengers now present a significant threat to incumbent providers as customers realise that the services they offer are often faster, more convenient, cheaper and more accessible.
- The rate at which the core services of retail banks are being eroded is accelerating at such a rate that the essence of what it means to be a bank in the conventional sense is now in question.
What is a bank?
The currently accepted definition of a bank is an organisation licensed to receive cash deposits. For retail banks, this means accepting customer deposits and holding them in either current or savings accounts. As such retail banks are, in essence, siloed repositories for consumer cash.
Across the world, the regulation that organisations must comply with in order to be legally allowed to take on this responsibility is extensive and expensive. Traditionally this has meant that, whilst the profits generated by large retail banks, such as the “big six” in the UK, have always been attractive, the scale and liquidity necessary to achieve compliance has left them largely unchallenged. Metro Bank, when it launched in 2010, was the first bank to receive a new full service banking licence in more than 150 years in the UK. This reflects the fact that the barriers to entry have traditionally been so high, that new entrants have deemed an effort at disruption not to be worthwhile.
This has left the conventional retail banking market overly concentrated and non-competitive which, in turn, has often led to poorer outcomes for consumers. The low interest rates that have been on offer to UK banking customers for the past six years are an illustration of this. In the last couple of years, and especially over the last six months, this has significantly changed.
Products and services come under threat
Tech companies have realised that they have significant advantages over incumbent retail banking providers. These younger, digitally-minded organisations have learnt how to use the tools at their disposal, including flexible open IT systems and extensive customer data, to redesign banking products in a customer-centric manner. These products meet growing customer demand for more mobile and accessible products and services.
These products, designed to meet customer expectations for 24/7 access and excellent customer service, are proving to be significantly more attractive than the conventional products on offer. For example, in its first eleven months of existence, Uphold, a cloud-based platform that provides members with a range of services from payments to international currency conversion, powered over $410 million in money transactions and gained thousands of members across 163 countries.
As a result, challengers such as Uphold are slowly eroding the hold that the incumbents have over the retail banking market, leaving them with fewer products and services over which they have complete control. This process, known as disintermediation, is accelerating as established tech giants, including Google and Facebook, have started to enter the space.
These players are in many ways even more threatening than the small-scale start-ups that are picking off services in a piecemeal fashion, as these behemoths of the digital scene have the power, resources and motivation to create digital financial ecosystems where customers can conduct almost all of their financial activity. For instance, when fully operational, the Google Wallet has the potential to allow customers to store their cards, send money seamlessly around the world through email, and collect location and other contextual data that enables the wallet to advise customers which payment method to use in which scenario in order to get the most benefits. The wallet could in essence become a pocket financial manager and advisor.
Current accounts: the final frontier
In the face of this level of threat, one fallback that conventional retail banks currently have is the current account. As of yet, whilst almost all other services have been attacked by fintech disrupters, the current account has remained relatively safe. Whilst the current account still remains in the hands of the incumbents, their core role as repositories for consumer cash is protected. Yet, arguably the only reason the current account has not come into the line of fire is because tech providers see it as a product that will, in the relatively near future, become obsolete.
As we have covered previously, Blockchain, the technology that sits behind the cryptocurrency Bitcoin, is a de-centralised record that can be used to store any commodity, including digital cash, in one place outside of individual silos. As money becomes increasingly digital, the usage of blockchain technology is becoming more widespread. It is likely that it, or another de-centralised and secure platform, will become the platform for storing all financial records. If this happens, there will be no need for banks to hold consumer cash in separate accounts. There will be no need for them to act as repositories.
At this point the core function of a bank to accept deposits will no longer be necessary. The essence of what a bank is recognised as today will have been undermined.
Whilst this might seem like an apocalyptic scenario for current all-in-one retail banks, it need not be. Instead it presents them with a challenge, and potential opportunity, to work out how to re-establish their relevancy. To help guide retail banks through this process, Mapa has created a list of digital trends that banks should be exploring. These are discussed more in Mapa’s latest Insight report, Ten Things Digital Teams Should be Doing in 2016, and include:
- Designing customer-centric apps
- Streamlining app strategy
- Removing friction from the onboarding process
- Using data analytics for targeted marketing
- Personalising functionality
- Personalising content and products
- Investing in open API technology
- Investigating the potential of Blockchain
- Creating a seamless story across multiple channels
By engaging in these activities, retail banks will ultimately be able to define a clear strategy for competing with the disrupters.
What is the Mapa Insight Series?
The Mapa Insight Series consists of a number of reports we produce on a yearly basis. The reports offer a detailed look into some of banking’s hottest topics; like tablets, PFM, mobile and social media. The research has a global remit and contains insights that are not readily available i.e. from within the logged in area.