The Future of Banking –  Promises and Threats

September 4, 2016

The past decade has already seen a lot of industry structures being redefined with leaders going bust and new age companies taking their place. One of the industries that seems to be on the cusp of going through a similar upheaval seems to be the banking industry.

The past decade has already seen a lot of industry structures being redefined with leaders going bust and new age companies taking their place. One of the industries that seems to be on the cusp of going through a similar upheaval seems to be the banking industry.

If you look at what a bank does at its core, it is only two things:

1. Collect money from parties (individuals, businesses and governments) and keep them safe and pay them whenever they need the same back. Banks in most economies pays a simple interest (and in some countries, charge a fee to safeguard the money for the party) on the money that it holds for the parties.
2. Invest the money that they collect in the form of loans (home loans, education loans, vehicle loans, business loans, credits) to people/businesses who need money and charge a fee (interest) for trhe same. They could also invest the money in other forms of equity or investment vehicles which gives them a better return than the interest that they pay out to their customers to collect money.

I think that the current model, is dependent on them being able to have enough cash that come inside the bank so that they can invest the same and make a profit on that.

There are at least 4 trends that seem to be working on the banking industry that they need to give heed to and may be re-discover what it means to be a bank.

1. Changing dimensions of managing currency
2. Rapid rise of Peer-to-peer economy & Disintermediation through technology
3. Changing nature of consumers

Let’s look at each one of these in a bit more detail.

Changing dimensions of managing currency and its movement:

One of the biggest reasons for banks to exist was to be the clearing house for managing and moving currency. If you wanted to transfer funds from one person/business to another person/business, you either did that through cash or through a bank. The increase in commerce, in general and cross border commerce in particular, necessiated the need to have a trusted partner who could move the currency from one party to the other without the inherent risk involved in moving cash physically. So, both the parties trusted the bank with their money and the bank was the entity that made entries in both their books and kept their money safe.

Today banks are not the only way to transact and move funds from one party to another, atleast in a small way. PayPal (and its clones), mobile wallets and telecom operators with services like mPesa can do a lot of heavy lifting today.

Today there are mobile wallets and telecom operators who are able to move currency and do so much more effectively. They have been able to crack one side of the equation – payments to be made. However, they are yet to crack the other side of the equation, which is how to get money directly into the wallets without having to go through a formal channel like a bank or a credit card. I am sure that this is something that they are all working on and it is only a matter of time that they are able to find a technical solution to solve this problem.

One simple solution is for them to partner with corporates and businesses (where they already have a footprint) and request them to directly fund the mobile wallet with the salary payments. The day this becomes a large scale operations, we will find that banking will lose a big chunk of their business.

There could be regulatory issues with this that I may not be aware of and that needs to be fixed before this could go live, but I am sure that it is only a matter of time that the mobile wallets or the telecom operators will figure this out.

Rise of peer-to-peer economy & Disintermediation through technology:

Kickstarter (and its clones) have already proved to the world that to fund an idea or an enterprise, you don’t necessarily need a bank. Yes, you do need a bank today to hold your money which you can then invest in an idea/enterprise through platforms like Kickstarter. However, once the mobile wallets are able to get the cash directly into their wallets, they can then integrate with the likes of Kickstarter and invest the money directly in the ideas/enterprises that they believe in.

Another area which is getting more and more critical is the business of bitcoins. With recent announcements from Infosys and TCS around building banking solutions around Bitcoin for their banking customers, we will see that bitcoin will have the potential to enter mainstream use. Once that happens, it will start questioning the validity and the use of regular currencies. The feature of Bitcoin that makes it much more secure is what will eliminate the need to have an intermediary like a bank to participate in a transaction.

What would be interesting to see (provided the regulatory environment becomes condusive) is for the mobile wallet companies and the telecom operators to adopt bitcoins and allows transactions using bitcoins. This is what will truly bring bitcoins in mass circulation and could potentially pose an existential threat to traditional banks.

Changing nature of consumers:

The behaviour of consumers is going through a sea change.

On one side of the consumer equation is the rise of the urban and tech savvy consumer. This is happening both due to the entry of the next generation of workforce and also the technological advances that the current users of banks have seen all around them. The proliferation of mobile banks, online banking, ATM’s, mobile wallets, etc have all made the consumers tech savvy and demanding at the same time. No one wants to call a call-centre and put on hold for a few minutes. Everyone wants self service options to take care of everything that they want to do on a regular basis. No one wants to wait for anything.

The competitive nature of the banks have also ensured that people no longer want to wait in a que even to get a loan, if they can help it.

On the other side of the consumer equation is the rise of the unbanked population. Just like this population moved directly to mobile phones and skipped the evolution of fixed line phones, I believe that they will move directly to the new forms of payment systems and skip going through a traditional bank completely. Not just because banks find serving this consumer segment totally unprofitable but also due to the fact that this population has shown that they are much more able to adopt to new technological shifts that offer significant benefit when compared to the traditional route. There is also social stigma and psychological reasons whey they would much prefer to go with the new technology than to go through a traditional bank, which seems too intimidating to them.

What could Banks do to stay relevant and thrive:

Given that these changes are happening all around the banks, in my opinion, the banks that could potentially ride these trends will actually come out winning on the other side in a couple of decades when compared with banks that fight this change. Some things that banks could do to ride this change could potentially be as below:

1. Make your Own Investment: Pro-actively provide a service for their customers (investors) which offers more control over the funds that they have invested in the bank, if they so desire. As not all investors will want to take this service up but I am very sure that there are customers who will lap it up. This could be a service similar to Kickstarter where investors can decide if they would like to take the risk on the business/idea rather than the banks to take the risk. The bank can then become the platform for people who want to invest and for people who want to seek money to pursue their ideas. This service is very similar to Kickstarter with only one difference being that the scale of operations could be significantly different and the model will allow the investor to get a financial returns on the investment that they make and not just be a part of the community that promotes an idea/business. Banks will be able to do this either by revamping the underlying architecture or by starting a new subsidiary that has this as the only product.
2. Partnerships: One of the most important things that banks need to do is to identify new partners that can enable them to bring new products and services to new segments of consumers or businesses. These would be partnerships that currently no one is thinking of. Partnerships that are so off the radar now, but when made, will suddenly create a significant opportunity.
3. Overhaul consumer experience: One of the easiest and the fastest things that banks could do is to do a complete rethink of their customer experience. One interesting things that we have seen here is a bank offering video call faciliuty for their customers from within their mobile app. This addresses both the need for self-service for most things and the convenience of speaking to someone at the bank if needed. More such ideas need to be explored in order to make every interaction with the bank an extremely simple and a delightful experience for the consumer.
4. Rethink their role as a bank: The most difficult but the most important change that a bank will need to do would be to rethink their role as a bank. One trend that I think we will see will be banks who identify a niche consumer segment and just serve them and serve them really well. The days of the large multi-purpose conglomerate bank will be numbered, at least for most such banks.

All said and done, banks need to act – take action now, set-up think tanks, explore technologies, understand consumer segments, explore ideas. They are today in a situation that they need to keep moving to stay relevant. It is a questions of survival for them right now, whether they like it or not, whether they agree or not.

These are exciting times for this industry and as a consumer, I am excited to see what this industry will morph into.

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