Banking as we know it is in the midst of its first fundamental remaking in centuries. What’s driving this transformation? Two major shifts: our transition to interacting with money digitally instead of physically, which opened finances to tech disruption, and a tech wave that has changed the way consumers define ease and convenience.
In just 10 years, we can expect banks (and other financial institutions) to look, from the outside, like a vastly different organization: a technology startup. That doesn’t mean branches will offer nap pods and catered lunches; rather, your bank will have placed newfound emphasis on the design and customer experience paradigm that has changed while retail banking has been playing catch-up.
Banks seek to recover lost ground
Banks have been caught asleep at the wheel in the Digital Age. It was left to PayPal, Square, Mint and others to build the online services that are top of mind for consumers today. On mobile, more people default to Facebook Messenger or Venmo to transfer money to a friend rather than a bank app.
But despite the proclamations of some visionary fintech founders, banks aren’t disappearing anytime soon. The engine under the hood of big banks — the compliance and money-transfer systems — are simply too difficult for any startup to replace, which is why tech plays like Apple Pay are still built on top of existing bank systems and payment rails.
To maintain the dominance they’ve enjoyed up to this point, however, banks need a radical redesign of their customer-facing assets. If banks fail to overhaul their exteriors to offer a personalized, best-in-class product experience, they will be relegated to supplying the engine for sleeker-looking tech companies in 10 years.
The big bank leakage
Thanks to steep regulatory costs and the need for physical infrastructure like ATMs and branches, banks have been shielded from the technological revolutions that have reshaped other industries. Without serious threats of disruption, most banks have focused on consolidating to drive down costs and cross-sell services, placing the customer-facing product experience on the back burner.
Now, however, as our interactions with money have essentially become invisible, the traditional selling points of a money service — moving, storing or growing it — have become table stakes while customers seek the product experience they want. For consumers, convenience is no longer about being a one-stop shop; it is all about fitting seamlessly into existing behavior. The success of mobile payments in WeChat should not come as a surprise when money enables social experiences.
Banks will either need to build their own competitive solutions, buy those solutions or strike deals that make banks a critical part of the “plumbing” for those solutions.
Banks’ inability to keep pace with these customer expectations led mobile banking satisfaction to decline in 2015. Technological advances have raised consumer expectations for a personalized, integrated service, while also reducing the barriers and cost for new entrants to do so, putting banks in a vulnerable position. While startups may not have the infrastructure and systems that give banks their staying power, they aren’t burdened by the legacy systems common in big banks.
Consequently, upstarts like Venmo, LendingClub and Wealthfront are stealing some of the most profitable segments of the market that big banks spent billions to consolidate. A Goldman Sachs report estimated the severity of this leakage, with $4.7 trillion in annual bank revenue and $470 billion in profit at risk of being displaced by fintech firms.
Those leaks would leave banks hanging on to retail banking operations, the least loyal and profitable segment of the market. Neither mainstream consumer banks nor more obscure factoring companies are insulated from the coming wave of fintech innovation.
To stave off that leakage, banks will either need to build their own competitive solutions, buy those solutions or strike deals that make banks a critical part of the “plumbing” for those solutions. OnDeck and JPMorgan Chase’s partnership is an example of the latter approach, and the first of many such alliances to come.
To remain relevant, banks will also need to forge new kinds of partnerships. In their growing sprawl, Messenger and Snapchat are aggressively expanding their commerce capabilities, and these companies and others will continue building out their financial services infrastructure. They have attracted large customer bases by delivering best-in-class product experiences, and they will be highly motivated to add extremely valuable financial data to their endless customer data streams. A button in WhatsApp could wind up being your bank’s most important touch point.
A thriving fintech industry
Some banks will strategically choose to invest heavily in building their own tech solutions, like Capital One with their Digital Lab. For many, though, it will make sense to leverage their infrastructure, deep pockets and formidable sales and marketing force while using startups as their R&D arm. Once the startup is user tested and approved, these banks will acquire or partner, then expand those services through the bank’s consumer base.
These big banks will continue to use their large cash hordes and low cost of capital to pay a premium to acquire and leverage fintech solutions and exploit the banks’ brands, marketing know-how and distribution capabilities to package and deliver the solutions to ready customers. Just as BBVA did with Simple, they’ll find willing partners in fintech to meet market demands. Although they are perceived to be antiquated in some regards, banks are an attractive home for fintech companies because they bring scale and turnkey regulatory compliance in all 50 states and beyond.
Ultimately, this will continue to sustain a thriving fintech industry where innovative startups that begin competing with incumbent banks end up as partners in the arms race for superior technology and a streamlined user experience.
Our financial services future
The fintech industry has orchestrated in just a few short years a sweeping change in customer preferences and expectations for the modern “bank” experience. The next decade will demonstrate the impact of this disruption as customers choose financial services based on the product experience, not on the breadth of offerings.
In 10 years, most banks will still be public-facing brands. Their role as a safe deposit box for our cash will continue, but consumers’ rising standards will force them to rise to the occasion, ensuring a best-in-class experience is a core component of their offering.
This unlikely alliance is just over the horizon. Both the old and new worlds will have no choice but to find a way to join forces, looking like startups while working like banks.