Nonbanks are the new kids on the block in banking services. They are the younger, more agile, more tech-savvy kid brother to the aging, slow-moving traditional banks.
The critical difference between banks and nonbanks is that banks engage in lending and depositing services while nonbanks only engage in lending services because they are forbidden from engaging in depositing services.
As a result, nonbanks aren’t required to be licensed as banks and are thus freed from the full barrage of regulatory regulations that traditional banks must follow.
The degree of regulation that banks must abide by makes it very difficult for them to adapt to new technologies and processes. And this makes it difficult for them to meet emerging customer demands. In contrast, nonbanks can very easily adapt to changing consumer need and embrace new innovations. As a result, nonbanks are ahead of the curve when it comes to bringing new services to customers.
This is having a positive effect on banks, too. By partnering with nonbanks, banks are able to offer these new services to their customers without changing their operating environment or jumping through red tape.
Here are three main ways that nonbanks are changing the banking sector:
1. Innovative payment services
As technology continues to advance, customers are demanding services that make banking easier and faster. New digital payment innovations include methods to increase transaction speed and make it easier for consumers and retailers to conduct business. And there are innovations that are coming out that could transform a 30 minute shopping task into one that takes only a couple of seconds to complete.
For example, Near Field Communications is pioneering exciting new payment processing, including the insertion of a microchip in a credit or debit card to communicate with a payment terminal without inserting it into the device so that customers can complete a transaction in less than a second by waving their cards over a pad.
Square Inc. produces software and devices that allow individuals to accept debit card payments using a smartphone or tablet. It makes it much easier for virtually anyone to perform face to face transactions, in the same way that PayPal makes it easier to perform online transactions.
Dwolla is a company offering online payment services for individuals and companies. It’s a similar concept to PayPal, but with a couple of important differences. Firstly, transfers go directly to the customer’s bank account – they aren’t held by the company until the client requests them. Secondly, they don’t charge fees for transactions of up to $5,000 for individuals, and $10,000 for organisations.
Peri is an extremely innovative product that combines the functions of a payment gateway with advanced image and audio recognition software, to enable users to quickly buy the things they see and hear in print, TV and on the radio. A customer would be able to use their smartphone to take a picture of a product in a magazine article or print ad. Peri will then recognise the item, and provide the user with a description and price, and a “buy now” button.
The caveat is that while there is a strong demand for all of these services, because these services are new, banks can’t jump on the bandwagon automatically. They are restrained by central banks and policy makers, who are still working to wrap their heads around the implications and issues surrounding these technologies.
2. Customer-centric service provision – Tapping into unmet demand
Banks have access to huge quantities of data, which reveal patterns and trends concerning user behaviour and needs. Predictive analytics applications can take these pattern and trends and predict how customers will behave in the future.
One of these trends is digital banking service provision so that that customers can conduct basic banking services anytime, anywhere. Today’s customers demand more – they want services through multiple channels, whether it’s through the web, on their phone or at the ATM.
Over the decades, we have seen steady progress in this direction, with banks offering telephone banking services, and slowly embracing the Internet. Nonbanks are now working on mobile banking services, which are positioned to be the next frontier in banking.
3. The movement to the cloud
Regulatory requirements and the need for transparency to auditors keep banks trapped in an outdated, on-site IT model. This increases the cost of scaling, as they must invest in considerable hardware and staff in order to expand their resources. Software development is often performed in-house and is slow.
On the other hand, nonbanks are moving to SaaS and cloud software options, which provide a number of substantial advantages: SaaS offers huge benefits, largely through economies of scale. Because the software is remotely hosted, economies of scale allow the developer to increase the size of the infrastructure, increasing redundancy and allowing for rapid scalability. In fact, with cloud computing services such as Microsoft Azure or Amazon Elastic Compute Cloud, it’s possible for these developers to rapidly scale up as their clients’ needs expand. This model allows clients to pay only for the resources they require, making it possible to scale up and down fluidly.
Because the SaaS platform is an open software platform, SaaS developers are continuously improving the platform by adding new features and fixing bugs. The faster development cycle means that clients are able to respond to changing market demands much more quickly. And all clients are always running the latest version of the software. With more clients using the same software, faults are discovered and fixed much faster than with bespoke software. This makes SaaS platforms generally more stable.
With fewer restrictions and greater freedom to embrace disruptive innovations, nonbanks are able to meet customer demands quickly. As a smaller organisation with a more focused offering, they can concentrate on their core competencies to provide a better service.
This is good news for customers and businesses, and in some cases for banks, too. For smart banks, partnering with nonbanks offers a way to provide in-demand services despite restrictions which would otherwise impede their efforts.