17 Sep What tomorrow will bring for banking.
A decade after the global banking crisis, 2019 looks like it could be a year of tipping points in the evolution of the banking industry. There’s no such thing as a perfect crystal ball for banking, so some predictions will undoubtedly be wrong. Nor is the industry perfectly homogenous and global. Some markets will evolve slower than others, while some are already over the top of the digital disruption roller coaster and picking up speed on the downslope.
This piece of thought leadership focuses on some interesting global trends that we are seeing in the banking sector that will ultimately shape Banking of Tomorrow and how we Bank in the Future.
BANKS WILL KEEP “UNBUNDLING” THEIR SERVICES.
Open Banking regulations from Europe to Hong Kong, Australia, Singapore, and — soon — Canada are fragmenting traditional retail asset and liability gathering in most markets.
Open Banking, a term for common interfaces among banks and other third parties to facilitate more competition – creates new business opportunities. For decades, banks have sought to become more “vertical,” oﬀering services from top to bottom. Now many new entrants want to be “horizontal,” dominating a lucrative niche area of specialty.
A good example of this is Stripe, a 7-year-old specialist payment provider, now commands a valuation within touching distance of Deutsche Bank – a sign that horizontal can be very attractive. We will likely see more fragmentation in 2019.
BANKS WILL WANT TO JUSTIFY A “FUTURE PREMIUM.”
Banks are learning from FinTechs, whether Amazon or start-ups, that have mastered the art of telling a compelling story about future-value. Conﬁdence in the business model evolution can command a ‘future premium’ of over 50% to current valuations. We are seeing a similar phenomenon emerge among traditional banks. For now, compelling stories of digital transformation are just that — stories. We haven’t yet seen proﬁts leap ahead noticeably from the rest of the industry. In 2019, digital leaders among the traditional banks are going to need to show that the investment, creativity, and ambition that built their premi-um valuation has resulted in higher enterprise ROEs. If they can’t, the conclusion of investors may be that for the foreseeable future, the “new” will be no more proﬁtable than executing well on the “old”. Then we’ll see the digital bubbles burst.
BANKS WILL MOVE TOWARDS A “NON-NAGGING” AI.
Verbal AI banking capabilities, like Bank of America’s Erica, have fast become table stakes. But what passes for advice often feels a bit like scolding. “Did you know you spent $50 on Coﬀee last week!?” or “Don’t overspend on groceries or you will overdraw.” Banks are trying to oﬀer more true ﬁnancial wellness advice that doesn’t feel like nagging.
THE SUN MAY SET ON “COMMUNITY BANKING”.
These should be golden days for small US banks. Economy is booming, interest rate spreads widened, credit losses minimal, and compliance costs coming down. But being a small local player has lost its competitive edge. Instead, banks with a compelling digital customer experience are winning
In deposits, the big three: Bank of America, J.P. Morgan Chase, and Wells Fargo have only 24% of US branches, but took nearly 50% of new deposit-ac-count openings last year. In contrast community banks have 50% of branches but have taken only 20% of deposit growth in the last 3 years. Outside of the top 25 banks, the credit-loan assets of US banks shrunk by over $30 billion in 2017, while digital-only origina-tors like Kabbage and On Deck and direct credit investors like Apollo and Blackstone boomed.
If smaller banks can’t ﬁnd a way to start oﬀering better digital services without spending billions of dollars, we’ll begin to see the twilight of the American community banking era.
FINTECHS ARE APPROACHING A TIPPING POINT IN THE UK.
Accenture research shows that the UK is the most disrupted traditional banking market in the world, with 15% of revenue and over a third of new revenue going to new entrants. The combination of eroded trust and a regulator keen to stimulate competition has seen a plethora of new ﬁnancial institutions appear, including Monzo, Starling, N26, Revolut and Marcus from Gold-man. While they have signed up millions of customers, the vast majority are secondary accounts.
Less than 20% of their customers use these “neo-banks” for their primary checking. The reaction of the entrenched UK banks has been to launch their own digital challengers and upgrade their core digital services.
New market data in 2019 would reveal if new entrants have enough suﬃcient momentum to win long-term and create sustainability, or if the counter-attack of the traditional banking industry will be strong enough to ﬁght oﬀ the threat of the digital “newcomers”.
CHINA WILL KEEP PUSHING MOBILE – DRAGGING THE REST OF US FOLLOWERS ALONG.
Alipay and WeChat Pay now have well over a billion regular users of mobile payments and conduct two-thirds of all global mobile payment transactions.
Western bankers who dismiss what is happening as unique to China are making a big mistake. Consider how this Chinese trend has spread to, say, Finland. In 2015, 500,000 Chinese tourists visited Finland. That number is likely to balloon to 5 million this year, and the Chinese tourists are staying twice as long and spending three times as much. Thousands of Finnish merchants now accept QR code-based mobile payments. Elsewhere, look at how Chinese inﬂuence is changing mobile pay in Singapore (which is adopting QR for low-value payments) and shaping India’s through Ant Financial’s stake in market leader Paytm. With Ant Financial now worth $150 billion and scaling its transaction processing system to handle 100 billion transactions per day, it’s only a matter of time before the Chinese also reshape western banking. There is also a major inﬂuence of China in Africa, where the [QR] is also taking oﬀ through Retail and Merchant Networks.
BANKS HAVE THEIR HEADS IN THE CLOUDS.
This debate quickly moved from beneﬁts of moving into the cloud to operating eﬀectively within it.
At the 2018 AWS re:Invent conference, while there was some straight-forward pitches for migrating to the cloud, much more of the focus was on what you do with your data once it’s in the cloud and, speciﬁcally, the analytical tools available from cloud providers. The allure of an “intelligent brain” indicates that the winners in digital banking will be deﬁned by oﬀering creativity and data quality, not merely the quality of algorithms. Knowing how to create something of value rather than just having the right tools is what will will ultimately matter and diﬀerentiate.
TECH COMPANIES MAY FINALLY SHOW THEIR BANKING HAND.
The boundaries between banking and the rest of the digital economy will continue to blur, and 2019 may be the year we see some of the big tech players make some deﬁnitive moves. There’s reason to think that Amazon and the rest of Big Tech will be forced to show their hands with respect to banking.
Major retailers, will need to decide whether they want to oﬀer ‘account to account’ payments that bypass the card networks. Amazon and Walmart will battle for digital commerce supremacy, while Ant Financial continues to fund mobile wallet Paytm, and Facebook launches WhatsApp payments. The most fascinating market to watch in 2019 is India, where almost all the Big Tech players compete.
BANKS WILL KEEP LEAVING LEGACY CORE SYSTEMS BEHIND.
Most big banks have decommissioned their antiquated core legacy systems, looking instead to wrap them in digital services that enable more speed and agility. There has been plenty of interest in core alternatives like Mambu, Thought Machine etc. 2019 won’t be a year of rip and replace
but build and migrate.
BANKS WILL STOP ALL THE LOOSE TALK ABOUT “PLATFORMS.”
The word “platform” has been stretched to the point where it has become meaningless, particularly in banking. A true digital platform business is an easily accessible two-sided marketplace that makes money by bringing buyers and sellers together and driving growth through network eﬀects – think eBay, Airbnb and Uber.
Amazon and Apple are only partly platform businesses. Facebook and Google are almost pure aggregation businesses, that focus on capturing your attention and then selling it to advertisers. In 2019, any bank that wants to talk about being a platform business needs to be very speciﬁc about the business model it is trying to pursue and stop throwing the word around to claim some of tech’s shine for itself. A pure platform business would be economic suicide for most banks as it would involve giving up their balance sheet. We are seeing in the UK, hybrid models like Bo or Starling, which oﬀer core bank-ing services while leveraging open banking to create a wider services platform, could be viable.