From loans, to clearing facilities, to investments, the services offered by banks have remained much the same for centuries. However, the processes underpinning the banking industry have only recently become ripe for disruption as technology has advanced.
In the last decade, innovation in banking has resulted in the rise of financial technology businesses, which have shaken up the status quo to open up new opportunities, and present new challenges, for incumbents.
Things are changing fast. In the next ten years, industry experts are predicting that cash will become virtually obsolete due to the uptake in digital payments; in fact, in 2018, electronic debit card transactions outnumbered cash payments for the first time in the UK.
Thanks to credit scoring technology, loans can be approved in minutes, rather than weeks. Even processes that would have previously been complex, like fraud detection, can now be performed by AI alone thanks to machine learning algorithms.
With so many traditional banking services being conducted without having to interact with a bank, and without manual intervention, does this spell the end for banking, at least as we know it?
Banking without branches
As fewer people are visiting branches, instead choosing to bank online, banks have begun investing heavily in digitising the vast majority of their core services. This change has been welcomed by many, particularly those who wanted a way to access banking services on the go, but with branches closing at a rate of 60 per month in the UK alone, rural communities, older generations, and those with no Internet access are feeling the impact.
One bank bucking the trend is Metro Bank, which has opened nearly 60 branches since it launched in 2010. As the first new high street bank in 150 years, they have been successful in acquiring new business by building their entire proposition around convenience and customer experience. Open seven days a week with extended opening hours, and customer service available 24/7, this challenger bank has set the bar high, and incumbents are yet to follow suit. The success of Metro Bank demonstrates that people still value being able to visit a branch, but at a time that it is convenient for them, which for many means outside of Monday to Friday, 9 ‘til 5.
Some established high street banks launched mobile branches to help fill the void, but to find out if the service is available, customers still require access to the Internet or need to call the bank to find out when and where the branch will be local to them – typically for just an hour and a half, once a week. Additionally, the services on offer are limited. This gap in the market could present opportunities for challenger banks to provide basic financial services in communities affected by branch closures – and do it better than the incumbents.
Banking without fees
Fees are still very much accepted as part and parcel of banking. Account fees, overdraft fees, and fees when transferring money are commonplace, but why are they necessary?
Banks are costly to operate, and while they are saving money with branch closures, they are having to reinvest heavily in technology. Charging fees is a way to recoup these costs, and of course, like any business, earn a profit.
With lower overheads and agile technology on their side, financial tech companies have been able to offer smaller and more transparent fees on a range of core banking services. International money transfers is one area that has seen explosive growth, while prepaid card issuers have been able to lower charges when spending or transferring money abroad.
Only time will tell if fees charged by incumbents will drop. However, banks may be able to achieve this without impacting their bottom line by partnering rather than competing with new entrants. Harnessing their technology to deliver better digital experiences means they can improve user experience themselves without having to invest in overhauling legacy infrastructure.
Banking without borders
Cross border trade is booming. On the surface, it appears that digital payments have opened up the e-commerce landscape like never before, yet what goes on behind the scenes is holding many global businesses back.
Making payments across borders is still incredibly complex, causing delays for suppliers, buyers, and merchants alike. In addition to being slow, traditional cross border payments are expensive.
Smaller banks are struggling to keep pace with the demands of their customers due to the fact that the larger banks they work with withdrawing from the correspondent banking network due to regulatory, risk and cost pressures. Financial utilities are moving in to address these issues by developing back-end solutions that optimise the entire payment process. This allows payments to be settled in minutes, rather than days.
Banking without banks
Banks are not going anywhere, but they are having to evolve. Larger banks, in particular, are deploying retrenchment strategies to allow them to focus on core services. Banks of all sizes have recognised the need to digitise and optimise solutions, and are collaborating with financial tech companies to do so.
New infrastructure-based technologies, like APIs, are opening up the banking landscape. Customers are being delivered an improved user experience on the front end via mobile banking apps. Robo-advisors are able to respond to simple enquiries, saving banks time and money by streamlining customer services. Financial technology companies are no longer the disruptive force long-touted as a foe ready to go head-to-head with the banks. By working together, and viewing FinTechs as friends, collaboration can be beneficial for all parties involved.
The possibilities for overhauling the banking industry seem almost endless. As well as technology, regulation has been an enabler, with legislation like PSD2 and the Open Banking initiative providing customers access to new products and services.
For the foreseeable future, banks will remain a dominant force in financial services, but in order to do so, they will have to embrace partnerships.