Every day the news on the country’s financial industry disappoints me a little more. The news is full of tragedy and disappointment, from banks failing to maintain required provisions against classified loans to thousands of crores of capital shortage in banks – there’s no end to it. It’s all just so… dark and ugly. Are we heading towards a financial crisis like the one we witnesses back in 2008 in the west? Even if I am being too pessimistic about the future, clearly the current banking system needs lots of repairing. It is, therefore, expected that regulators are going to impose lots of restrictions, reporting, fines, etc. on banks, and our banking colleagues will be busy (even more so than before) dealing with numerous new rules and regulatory requirements. Caught in the headlights of regulation and cost reduction, innovation at banks will take back seats. At the same time, some of the game-changing technological innovations will transform the way we live will become part of our everyday life. The already existing gap in financial industry between customer expectation and the experience these institutions offer, especially from a user experience and convenience perspective will widen further. The gap will become so big that even non-traditional players, mainly technology firms, will decide to jump in and capture this opportunity. Many of these technology firms have daily existing touch points with customers and to certain extent they have trust and confidence of the customers. As a result, banks will lose out to these new players that provide more effective financial products and services attuned to the digital age.
In our day-to-day lives, we experience products and services that are outcomes of exponentially radical thinking and innovations. Increasing consumer expectations, the influx of FinTech competitors and the reduction in margins are forcing banks to rethink their current business models and sources of revenue. Although innovation is a proven path to differentiation and competitiveness, the banking industry’s short-term focus, siloed approach to operations and risk-averse culture work against the potential for meaningful advancements. In the moment of crisis, banks that do things in old conventional ways will significantly lose their grounds. But here is the interesting fact – some of the greatest businesses in the world were created out of crisis situation like today, if I were to name a few – Apple, Microsoft, Disney, they all were brought out of severe economic crisis.
With advances in technology, the relationship that customers have with their bank and with their finances has changed. Customers rely less and less on walking into a branch for their banking needs, and instead have digital options to help them – ATMs, cards, mobile phones, and Internet banking. So far these have been seen more as additive to a customer’s banking experience but when do we go over the digital disruption tipping point and see a change in the fundamental banking business? Across the world, there are thousands of new and dynamic FinTech startups that are offering products earlier used to be offered only by traditional banks. Peer-to-peer lending platforms now offer consumers an alternative to loans that used to be previously available mainly at banks. Robo-advisor platforms offer consumers asset management solutions that are not only more transparent in what they charge you, but also substantially cheaper. These newcomers have the ability to pick and choose the parts of banking they want to get involved – obviously the most profitable parts. It is very unlikely that a FinTech startup wanting to become a deposit taking institution. They are happy to control the consumer-facing part and leave the back-end to traditional banks, things like post trade settlement, reconciliation or regulatory reporting. This may create a new banking model in future with the traditional banks are handling the back-end (basically becoming commoditized utility providers) to these FinTech firms who control the front-end and the customer experience. In China, Internet giants have moved into financial services and gained considerable market share in e-commerce and third-party payments. These new entrants were faster than the banks to offer convenient, reliable, fast and cost- efficient alternatives to traditional bank payments. China’s FinTech companies often have as many, if not more, clients than the top banks and their FinTech players often have well-resourced parent companies in e-commerce and finance that can sustain large and more balance sheet intensive businesses. In China, they are past the tipping point of digital disruption: FinTech companies have both scale and innovation. Bangladesh is the next big opportunity.
FinTech start-ups embody the core principles of innovation to drive commercial success. They embrace risk-taking and failure, while rewarding success. They are agile and can pivot immediately to meet market demand. Because they are usually small, they can think big. But because they are small, scalability can be a challenge. Although FinTech companies have the advantage of new innovation, incumbent financial institutions still have the upper hand in terms of scale. Regulation is also a major challenge that FinTech industry is facing. In order to fuel digital disruption, regulators will have to play a big role by creating right environment for FinTech companies to grow and excel. They can create small ‘sandboxes’ that allow businesses to test innovative products, services, business models and delivery mechanisms in a live environment.
The question is whether banking can replicate the best of FinTech start-ups, while leveraging their customer base scale advantage to respond to a changing marketplace. Or, will the majority of the industry need to be a fast-follower or laggard … with the inherent risks. Can banking accept the risk of failure and support potentially disruptive innovation? In an online poll conducted in Facebook group (Bankers of Bangladesh),
many of them believe that financial technology in the form of Mobile payments, Blockchain, Peer-to-peer lending, crowdfunding, etc. will bring about the most significant changes to the financial services industry. Historically, the banking industry was reasonably good at integrating new technologies in order to better serve customers, automation was seen as a value addition, but in today’s context the speed and convenience offered by the banks are generally below the expected levels of the customers. As such, investing in IT is a must and is more about getting the hygiene in place. Therefore, it is advisable to look at collaborative models within the industry as well as among various expert groups to build a common R&D venture where extensive market research and product/process prototypes are generated and then on a collective basis to launch them to the market.
As customers shift their behavior and move more towards digital solutions, banks will need to rethink their digital strategy. Digital disruption has the potential to shrink the role and relevance of today’s banks, and simultaneously help them create better, faster, cheaper services that make them an even more essential part of everyday life for institutions and individuals. To make the impact positive, banks must acknowledge that they need to shake themselves out of institutional complacency and recognize that merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence. I believe an omni-channel strategy is the winning solution for incumbent banks over the next decade. This should be built around a competitive digital offering, a reduced and modernized branch network, and lastly, a targeted channel strategy for different segments of customers.
Think about it. Today our life is continuous, but our customer experience is anything but that. We learn and have memory of all the good and bad things in life. We strive to limit or eliminate the negative ones and increase the good. These patterns that we strive to replicate are our preferences. The ability to have a continuous experience across brands, across format and across devices that is completely bespoke – that is the promise of a new way of thinking and marketing that has been long unnoticed.
So what do we see in the next decade? We envision an industry with a vastly different competitive landscape: New entrants with digital prowess will gain prominence, while many financial intermediaries will be forced to alter their strategies to compete. As a result, there will be greater industry fragmentation and blurring of industry boundaries, with financial services increasingly offered by an emerging breed of non-banks. There will be greater efficiencies across the board as a result of greater digitalization. Customer experience overall will improve with each passing year, but traditional banks face the prospect of losing control as these digital experiences become the norm. We will also see greater competition between banks and the FinTech disruptors. Institutions that develop expertise in collaborating with their extended network of suppliers, partners, external talent, and regulators will have more control over their destiny.
Author: Firoz Khan
A Banker-turned-Entrepreneur, Firoz is the Co-Founder of Financial Forum Bangladesh and CEO of Finova Technologies, a FinTech firm.