At some level we must recognize that we are unstable creatures living in frequently unstable circumstances. This makes it impractical to stash all of our millions (hopefully) in pillow cases or secret safes, so instead we give our money to an institution that we perceive as stable and secure. Consequently, we also create an engine of commerce because that money can be lent out on a basis of risk, permitting businesses to be started so that we can make money and spend money.
We’re going to continue to need banks, or similar institutions, but if existing banks hope to survive and thrive they are going to need to develop (or change?) to suit evolving needs.
As with most industries, the internet and mobile have created opportunities to disrupt traditional banking. For instance, traditional banks risk being disrupted by a wave of Fintech startups. These are companies using new technologies to provide innovative kinds of financial services.
These companies all enable an “unbundling of banking” by providing individual services, rather than an entire – and pricey – package of services which you may or may not need. In particular, millennials and underbanked nations, such as Kenya or the Philippines, are gravitating towards these new fintech services because they provide value at a lower cost for more people.
Traditional banks do still hold a few key advantages over new entrants to the market – chiefly a lower cost of funds and privileged access to customers. However, this advantage has been eroded by a new regulatory agenda since the financial crisis and by new technology that has enabled smaller entrants to compete for customers.
In spite of these trends, banks are fighting to stay relevant and essential. To avoid being disrupted, traditional banks are incorporating the same cutting edge Fintech services, both by building their own product offerings and partnering directly with the Fintech companies.
Below are five ways that banks are adapting and innovating.
Blockchain is a distributed database of a continuously growing list of ordered records called blocks. Once recorded, the data in a block cannot be altered retroactively. This makes Blockchain a system that is inherently secure by design. As a result, Blockchain can be a powerful technology for banks hoping to innovate because trust is built into the technology.
At a time when so few people trust their banks and banks are burdened down by regulations, this can provide a critical advantage. Blockchain can provide an automated trail of evidence that a bank has acted in accordance with regulatory requirements.
Banks have already begun to experiment with the possibilities of Blockchain. For example, ABN AMRO recently began a Blockchain pilot for real estate transactions.
Robo-Advisors are web-based financial advisor programs that use cognitive computing to understand, analyze and solve problems for customers, all without human involvement.
Historically, in order to hire a financial advisor, customers would need to invest $500,000 in assets or more and put up with a one to two percent annual charge. Robo-Advisors enable customers with relatively low net worth to manage their money for a fraction of the cost of a traditional advisor JP Morgan CEO Jamie Dimon has even stated that their Robo-Advisor will be free.
While this technology was pioneered by start-ups like Mint, Betterment, and Robinhood, banks have taken strides to enter the Robo-Advisor market. This is the logical move because Robo-Advisors both challenge banks control over the wealth management industry and offer a way to improve the customer experience for clients without prior access to financial advisors.
3. Peer-to-peer payment
Peer-to-peer systems enable customers to easily and cheaply transfer funds to each other, sometimes even internationally.
According to Barry Sommers, CEO of Chase Consumer Banking, these types of payments are up 80 percent from 2015. The global market opportunity for these P2P payments is over $1 trillion. Currently the P2P market is divided between a host of different platforms, including: lendingClub, Zelle, Venmo, and Paypal as well as social platforms like Facebook and Snapchat.
If banks can marry customer trust with the convenience of their competitors, then they can dominate the P2P payment market. In 2017 banks are making this push with clearXchange, a bank-owned payment service that works with 7,500 financial institutions and 25 million users.
4. Data monetization for merchants
Data monetization for merchants is being pioneered by companies like Ned Bank.
This South African bank has developed a new commercial data service for clients called Market Edge. The new program provides merchants with access to credit and debit information that includes geolocation, demographic, and other transactional data.
This information can enable merchants to gain new understanding of customer behavior and patterns, in order to improve product development, inventory management and staffing. This approach takes the existing advantage of traditional banks, namely a deep research budget and treasure trove of customer data, and uses it to match the responsive customer experience provided by other industries.
5. Open API
Open API, or application programming interface, could turn the bank into a platform and avoid a war of attrition between Fintech startups and banks. Some banks are beginning to consider offering themselves as a platform for their Fintech “competitors”.
It’ll always be a challenge for banks – large institutions which are slower than start-ups by nature – to compete with an ever growing wave of innovating Fintech companies.
Banks like ABN AMRO see offering an open API to Fintech companies as a way to avoid competition and engage their customers. An open API provides a digital gateway to a company’s data and services. This can be a win-win for both banks and Fintech companies.
None of these innovations represent a silver bullet for the challenged banking industry. Instead they represent a process banks must undergo in order to engage and retain their customer base by providing the customer experience, technology functionality, and responsiveness that they have come to expect.
As the advantage that banks have in terms of legacy customers breaks down and new entrants, that are digitally native, gain legitimacy banks must innovate or die