Technological innovation is fundamentally changing the paradigms of the entire financial sector, transforming operating models, relationships with customers and forms of competition
by Alessandro Hatami
A revolution is taking place, in one of the sectors least prone to change and the most lagging behind in innovation processes. It is the sector of services financial - and in particular that of the banks - which is going through a transformation deeper than the invention of the check, the launch of the credit card or the introduction of the ATM.
New technological capabilities, the transformation of customer expectations and the growing pragmatism of regulators have created a real one Revolution digital in an industry known for its reluctance to change. Finally, the Covid pandemic has further accelerated the pace of this radical digitization.
This break with the past has changed the foundations of the industry. For banks the digital revolution it is not just the introduction of new distribution channels, it is actually a profound rethinking of how to operate, how to treat customers and how to create financial products. Adopt the digital revolution it no longer means selling banking products to customers, but helping them achieve their life (and financial) goals.
Just as Banco di San Giorgio (the first real bank in the modern sense of the word) operated 600 years ago. The bank-customer dialogue of an ideal digital bank aims to help customers meet their needs with tailor-made financial solutions, and not to sell them rough banking products that do not fully meet their needs. So the question to ask is: what will the future of our banking system look like after this revolution? Below we outline four macro-scenarios on the possible bank of the future.
SCENARIO 1 The Better Bank
In this version of the future, the banking revolution has run its course and almost all customers see it in the digital there main mode of interaction with your bank. Some large banks have taken advantage of the opportunity and redefined their operating models to meet the new digital requirements. They have redefined, restructured and rebuilt their platforms and processes, offered new banking proposals created internally and often also through collaborations with other companies. But, more importantly, they made the most of their most important resources: the relationship with existing customers, the deep knowledge of the complexity of banking services and branches in the territory.
Through the creation of a competitive digital offering, the training of employees and the redefinition of some branches (after closing most of them), these banks have been able to build loyalty a large part of their existing customers becoming a better bank for the future. Better Banks still represent a large chunk of the banking market, having completed the transition to a new modus operandi. Good examples of possible winners in this scenario could include Wells Fargo in the US, Lloyds in the UK, DBS in Singapore.
SCENARIO 2 The NeoBank
In this possible scenario, many historic banks did not survive the digital revolution. These banks have not been able to meet the needs of their customers as some of their competitors have. Over the years, most of the customers of these banks have preferred to leave their bank rather than accept a level of offer and service below their expectations. Customers have moved to new banks created for the digital age, banks that offer products and services similar (but not identical) to those of traditional banks, but which do better than most traditional banks were able to. Do. Often these NeoBanks offer banking services without actually being banks. Interestingly, their customers don't care that they are a real lender. This is also due to the fact that many of the regulators have found ways to ensure adequate oversight, allowing these innovative companies to offer new banking services without putting the customer at risk.
These NeoBanks effectively reinvent banks' operating model for a digital future. Today some of the most promising players in this scenario are: Chime in the US, Starling in the UK and NuBank in Brazil.
SCENARIO 3 The Hybrid Bank
In this scenario, thanks to the progress of the digital revolution, a large number of historic banks (and also many NeoBank) would realize that they could improve their offer through collaboration with partners. These partnerships would initially focus on proposals that are difficult or expensive for banks to implement, such as cross-border payments or specialized loans. But slowly some more fundamental proposals such as mortgages, investments, pensions and more would begin to be offered through partners.
This would create a new type of digital bank, which would allow customers to access multiple providers with a single login and a single interface. These new aggregators would be able to provide a full suite of the best banking services available on the market without having to develop them on their own. Furthermore, the partnership model would offer the possibility of updating and transforming one's offer in a much faster and cheaper way than an internal development. Good examples of companies following this operating model are Monzo in the UK and N26 in Germany.
SCENARIO 4 The Disintermediated Bank
As they become more disenchanted about their bank, customers may start to feel increasingly comfortable accessing financial products through entities and non-bank channels. They would start using their favorite social platforms, hardware vendors, or even retailers as an acceptable way to access financial services. For these suppliers (often Big Tech with huge customer bases) success is based on established business models, independent of the profitability of the financial services offered. Therefore, these organizations could offer services at cost - making them very competitive in comparison to banks and Fintechs. Customers would have confidence in turning to a supplier they know, in the belief that they would not be exploited, as they had been in the past by banks.
These companies would integrate the financial offering into their proposals to customers, often allowing the customer to carry out banking transactions without even realizing that they are actually doing it. The integrated financial proposals would start with payments, followed by credit offers at the point of sale (Buy Now Pay Later would be their Trojan horse), then personal loans, savings and, finally, investments, insurance and pensions.
Regulators would initially remain calm, considering the Disintermediated Bank as a new way to offer greater transparency and competitiveness without increasing potential risk to the client as the actual suppliers of the financial product would already be regulated. This could slowly change over time and regulators would start introducing specific requirements for this operating model; however, these additional rules would not discourage Big Tech.
Disintermediated Banks would begin to develop better and better services by making it easier - and more fun - to work through their platforms rather than going directly to the banks. These financial services would still be provided by banks (old, new and aggregate). Gradually banks would start operating as public services - they would provide banking services, but they would not control the customer relationship.
The drivers of this scenario are the usual suspects GAFA (Google, Apple, Facebook and Amazon in the West) e BAT (Baidu, Alibaba and Tencent in Asia). A first preview of this scenario is currently visible in the Apple Card offer in the US and WeChat in China.
These scenarios are obviously archetypes and it is very likely that all four will be present in the future. Today we find ourselves in circumstances similar to those faced by retail in the 2000s. Technology has changed all paradigms by transforming operating models, customer expectations and the shape of competition. Many established names in the industry prior to the advent of dot.com have been wiped out and new entrants have taken over. That said, several established players have successfully transformed their business models and some start-ups have been able to create exciting new offerings - today both groups co-exist. Good examples are Walmart and Amazon, respectively.
The same will happen to banks. The question is, what do you need to do today to make sure your company is up and running in 15 years and doesn't follow the fate of the Virgin Megastore and Pets.com?
Alessandro Hatami he is the founder of Pacemakers.io, an advisory company specializing in digital transformation in financial services.