Is technology accelerating the end of the monopoly banks have on banking?
The last few years have been marked with disruption and transformation. The transformation has been driven by human resilience to tackle, adapt and improve — be it to adapt to the new normal in the pandemic era or to bring more smiles around the world. Years from now, we will look back and say that this is the time when the world fundamentally changed.
One industry that has seen transformation like never before is Banking and Financial Services. Traditional banking as we know it is history now.
What was driving the monopoly banks have on banking?
- Regulatory compliance restrictions – Various guidelines, which include local, state, federal and international guidelines, made the financial services industry a fortress.
- Vast amount of customer data – Banks had a monopoly on customer information and the processing of the information.
- Brand value – The term “bank” commanded confidence from consumers in the past. The financial meltdown of 2008-09 changed this. The consumer trust in banks fell to an all-time low.
Changing consumer preferences, financial technology companies (Fintechs), the pandemic, new technology breakthroughs, and access to vast amounts of data are driving this transformation. We are in the digital and 5G era. The most interesting phenomenon of this transformation is that we see banks innovating with the help of the latest technology while technology firms and Fintechs are entering the banking industry with innovative solutions.
This leads me to the question — Is the monopoly banks have on banking coming to an end? It’s an exciting era for consumers… Innovative products and different choices are at their fingertips now…
While external factors have accelerated the transformation, there has been a fundamental shift in consumer behavior. This is driven by millennials and Gen Z’s who have grown up with smartphones and social media. They are digitally savvy and willing to trust and try new methods of service. They expect:
- Convenience – Easy to engage and anytime service.
- Seamless experience – Consistent multi-channel experience with minimal touchpoints
- Speed – Fast response every time
- Security – Secure and compliant service with safeguards and privacy guaranteed
All this has led to a redefinition of customer loyalty. Imperfect competition and pain of change was forcing loyalty previously. It’s not the case anymore. Technological advances and the appetite for innovation has led to new services and offerings being rolled out at record pace.
The changing landscape has led to the emergence of:
- Fintechs – These companies are leveraging technology to enhance every single aspect of banking, including customer onboarding, savings, payments, trading, investments, retirement, and lending. They go deep and focus on eliminating frictions and create an exceptional customer experience. A type of Fintech company that is disrupting traditional banking is Neobanks.
- Neobanks – Neobanks are digital-only banks that perform all banking services digitally, either through mobile apps or desktop. In the US alone, neobanks are expected to account for 20% of all accounts by 2025. Neobanks operate either independently or in partnership with traditional banks. Neobanks are not saddled with the high cost of legacy infrastructure and physical branches. Chime, Monzo, and Current are a few noteworthy mentions.
- Mobile banking – With more than 6 billion mobile phones, mobile has emerged as the most popular channel for consumers, especially the younger generation. Phones have become the primary channel for online transactions and are trending that way for in-person transactions. The availability of cost-effective mobile phones, 5G connectivity and secure infrastructure has led to an explosion of mobile transactions.
The technological advancement over the last few years has led to a bonanza for the customer, and this trend doesn’t show any sign of slowing down. Some of the technology trends driving this are:
- Cloud adoption – Cloud migration, transformation and innovation on cloud has become the focus area for the technology leaders at financial services companies. “Banking on Cloud” is the new norm.
- AI and ML – The pandemic has increased the use of AI across different aspects of banking: From automation of repetitive back-office activities to risk and fraud management, and now to customer-facing functions. The use cases and possibilities are immense as the AI models get more capable of handling diverse business scenarios.
- Mobile technology – About 65% of the global population who are unbanked own a mobile phone. Now more than ever, banks have the opportunity to put banking literally at the hands of the customer.
- Blockchain – With its distributed, secure, and governance-based framework, blockchain will lead the democratization of banking and financial services. The industry has been notorious for secrecy, and blockchain enables transparency, speed, and security.
Cloud, AI, Mobile and Blockchain when put together can significantly improve customer experience by providing personalized service. The race is on to leverage the power of technology to bring the benefits to the customer. Whoever does it first and consistently stands to win big.
Now this brings us to the question — How do the legacy banks and financial services companies adapt in this new era?
1. Build an ecosystem – The days of Build-Your-Own-Product are gone. It is inefficient, time consuming, expensive, and below par. Increase the depth and breadth of services offered by partnering and creating an ecosystem.
- Strategic partnership – Enter into strategic partnerships with Fintech and technology firms to build and provide specific products and services by leveraging the strength of both companies.
- Investment – Invest and acquire stakes in Fintech start-ups with intent to leverage their products and offerings.
- Acquisition – Acquire Fintechs and enhance the breadth and depth of service offering.
- Buy – Be on the constant lookout for services and products that can enhance the offerings to the customer.
2. Redefine offering – Constantly analyze what the customer expects and look at what the disruptors like neobanks offer. Redefine the offering to attract and retain customers.
3. Reinvent the business model – Asking the customer to pick from a set of products is a recipe for failure. Focus on personalized offerings that cater to specific customer needs. The pricing models have to adapt to cater to the new business models.
We are in an era where banking as we know it is changing fundamentally. Customer loyalty was and will continue to be the measure of success and performance. Personalization has and will continue to grow loyalty. As a customer, we are in for a treat. Take banking to the customers.
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And because our approach is iterative, your enterprise will be able to enjoy all the benefits of new information technologies, such as having the agility to adapt quickly to the demands of the marketplace, while keeping your legacy systems humming behind the scenes.
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