Long gone are the days where it was necessary to enter a physical bank in order to handle and manage money. Recent technology has opened up a whole new world of opportunities in both retail and consumer banking. Yet the banking sector’s digital transformation is far from over. Numerous demographics have accessed financial services digitally for some time now. However, the trend has only intensified since the start of the pandemic, which accelerated the mass closure of physical bank branches, encouraging even greater exploration of online alternatives.
While far-reaching innovations in the industry were already on the horizon, Covid-19 created a catalyst for even more change, and many of the customers who embraced online-only banking over the past year have managed to adapt. In fact, almost half of respondents in a survey by DepositAccounts revealed that they would gladly never return to a physical bank branch ever again. Banks need to continuously evolve in order to stay competitive in a market full of companies using technology to give their customers the best possible experience.
Fintech has accelerated banking digitization
The rise of fintech has given banks plenty to think about. While a bank markets products to customers based on interpretations of data gained through personal contact, a fintech company is entirely customer-centric, using hard data to flexibly respond to unmet customer needs. We only need to look at fintech’s role in the success of open banking over the last few years, whereby customers allow access to their financial information so they can receive products and services tailored to their situation and achieve their financial goals.
Fintechs are incredibly efficient due to the incorporation of artificial intelligence and machine learning to automate processes and reduce errors. One paper in The Review of Financial Studies found that fintechs processed mortgage applications 20 percent faster than other lenders without a rise in defaults. In addition, there are fewer staffing needs due to the fact services are accessed virtually and aren’t burdened by outdated legacy software, allowing focus on maximizing innovation.
Thanks to the growth of fintech (and mobile apps in general), banking customers now have higher expectations and seek user-friendly interfaces, greater convenience, and efficient, personalized services. As such, banks must meet these expectations in order to attract and retain customers.
Big Tech has moved into banking endeavors
There are many fintechs with bigger consumer bases than banks, and banks are already losing customers to them. On top of that, banks are right to be concerned about Big Tech — the largest and most dominant companies in the US IT industry — moving into financial services. Google, Apple, Facebook, and Amazon are already making waves in the sector by offering payment and credit products. Over in China, two of the country’s biggest tech firms (Alibaba and Tencent) currently cover 94 percent of the Chinese mobile payments sector.
Unlike fintech companies, Big Tech firms already have exceptionally large customer bases, impressive reputations, and funding capabilities. They can also take advantage of an abundance of customer data — without the strict regulatory limits faced by banks — using sophisticated tools such as AI algorithms to analyze, understand, and influence. All this combined with additional cutting-edge technologies make Big Tech platforms a genuine threat to traditional banking organizations burdened by legacy systems.
For example, in November 2019, Google enabled its users to open checking accounts through its Google Pay app. These accounts have no monthly fees, overdraft charges, or minimum balance requirements, and users can take advantage of rewards and offers based on their transaction information. “While rewards are prolific in the US on credit cards, very few checking accounts or debit cards offer rewards programmes because of the low interchange fee,” commented Alyson Clarke, principal analyst at Forrester. “So, if Google offers a generous rewards program, that could put pressure on the banks to follow suit.”
Will banks compete or collaborate?
The increase in competition and the growing popularity of digital finance means that banks have a big decision on their hands as we move towards a post-Covid-19 world: compete or collaborate. And for the most part, it looks like forming partnerships is the more favorable option. The digital revolution means that banking must move toward customer-centric platform-based models, and financial institutions will need the help of tech-minded organizations in order to effectively restructure.
In the case of Big Tech, many of the companies have happily partnered with leading names in the banking sector - for example - Apple and Amazon with Goldman Sachs, and Google with Citi. This has clear benefits for the banks involved. Big Tech firms can bundle their existing services, like e-commerce and online advertising, with traditional banking products, while financial institutions are unable to copy this strategy. Similarly, such collaborations mean Big Techs don’t need to obtain banking licenses and be held to the same regulatory standards as the banks, which could constrain their innovation capabilities.
That said, not all banks will want to collaborate with Big Tech as they could experience reduced profit margins if these companies assume control over the customer interface. While other banks simply may not be able to afford partnerships like these, that doesn’t mean they can’t still compete. Banks do still hold plenty of advantages over Big Tech. For example, they may have greater client trust and security, better understanding and experience of regulatory standards, and be able to offer products that Big Tech firms can’t. Nevertheless, in order to compete, they will need the help of fintech companies.
Example: Cross-border payments
If we look at cross-border payments, the volume of international transactions is on track to increase in the wake of Covid-19 due to the growth of global eCommerce, the number of new SMEs, and the fact that employees are increasingly working remotely, which may well be overseas. There could also be an increase in remittances. Recently Google Pay enabled its US customers to quickly, safely, and reliably send money abroad to users in India and Singapore, and expect to expand to over 200 countries by the end of 2021. Banks, on the other hand, typically charge much more for this service (which often takes days to complete via traditional wire transfer) and are therefore likely to lose even more market share. Yet by teaming up with a fintech company that uses cutting-edge technology to streamline the international money transfer process, banks can offer services with the simplicity of domestic bank transactions and at a lower rate.
To stay competitive against the very real threats posed by Big Tech, many banks are likely to realize that working with fintech companies allows them to take advantage of the technology and data they really need in order to evolve, restructure, and meet the needs of their customers post Covid-19.
Stan Cole, Head of Financial Institutions, Inpay