A new tomorrow for the financial sector
We are well ahead of the financial crisis, and new players are now entering the sector, causing changes that will probably exceed even our wildest guesses. But there are facts, developments and trends that we can use to qualify our guesses. Here, we will give you our qualified guess on the topics that companies in today’s financial services industry should consider – now and in the future.
We state the obvious when we say that the financial sector is changing – but exactly how it is changing is a guess. However, we can make it a qualified guess. With the global financial crisis well behind us, volumes and margins in the sector are growing, making it increasingly interesting for new players to enter the sector. Here, we often tend to think of fintechs as the disrupters in the industry, but they are not alone. The big techs are rapidly on their way to entering the arena, but by completely different means. So which topics should the financial services industry consider?
Trust is essential – gaining it, keeping it and using it in a way that ensures that we don’t lose it. Today, as a result of the challenge from fintechs and big tech companies, trust is already the main asset when banks and financial institutions want to win customers over and ensure low churn.
The theme of trust is overarching in the entire industry. Fintechs and big techs have already established some trust with customers and are increasingly gaining trust based on smarter services and perceived reduced prices (perhaps due to fewer overheads) supported by secure systems. On the contrary, medium and large-sized banks have to fight hard to ensure that they are still trusted by their customers, as they are heavily affected by legacy systems and compliance regulations.
The banking industry is being changed by technology, regulations and customer needs – but what does the bank of the future look like?
The easy answer to this question is that the bank of the future will have a very strong focus on customers. As stated by the CEO of ING, “In essence, a bank has only a few core products”, and to distinguish itself from other players, it is now more important than ever to focus on simplicity and ensuring that bank products are where the customer is.
Across the sector, we see a common belief that putting the customer first is the only way to succeed – however, we also see many variations of how to do so.
Some banks are moving towards a digitised business to reinvent the service. Examples of such new banks and fintechs are Revolut, Monzo and N26, which all operate without any physical presence on the market. Instead, they operate through very appealing apps and other digital channels. A similar example is the well-established bank ING, which now has 8 million customers in Germany, although it does not have a single branch.
It takes 15 minutes to become a customer with Revolut and with one click, you also have worldwide travel insurance that only charges you while you are travelling.
At the other end of the scale, and despite widespread opinion in the industry, analysis by the RFi Group1 shows that millennials prefer to use a combination of digital and physical channels. This trend is acknowledged by Metro Bank, a medium-sized UK bank founded in 2010. Metro Bank has a strong focus on the purpose of bank branches and now runs 57 “stores” across the UK, using these as a competitive advantage.
Apart from reinventing itself, the bank of the future must also be able to collaborate with other players in the sector. Rather than acquiring fintechs, more and more banks move towards co-operation with or even co-ownership of fintechs. An example is innovation at ING. ING currently works together with more than 150 fintechs – building and sharing knowledge between one another. However, as stated by Andy Maguire, COO at HSBC, it is important to thoroughly define the purpose of the collaboration and the actual concrete value that it will bring.
In addition to banks and fintechs, the big techs are also approaching the market. This creates an entirely new challenge for established banks. Big techs enter the market with a different viewpoint on customers and existing knowledge on how to engage and interact with customers through social media or other platforms.
Google, Apple, Facebook and Amazon (also referred to as GAFA) have earned loyalty among customers by developing relevant services with high usability – better than anyone else has done before. And as they are expanding, the financial sector is now looking to them and asking itself:
Why shouldn’t the financial sector be able to do the same with payments and other financial services as big techs have done with telecommunications, music and transportation?
But before GAFA really starts disrupting existing fintechs and banks, they themselves should be wary. GAFA is changing into FATBAG, consisting of Facebook, Amazon, Tencent, Baidu, Alibaba and Google, as the new Asian giants are growing at a fast pace. Today, Alipay, the financial arm of Alibaba Group, is the market leader of mobile payments in China and has a total of 870m users globally. And in addition, they are looking to support the expansion of Chinese influence across the globe2.
Open banking is a common concept in the US and UK, and it was recently implemented through the European Payment Services Directive (PSD2). The concept of open banking will completely change the way we look at and use financial services in ecosystems, as financial institutions now must open up upon request from the customer, which changes the balance between bank and customer. With reduced transaction costs and increased transparency, customers are now able to choose even more freely, and we predict that this will benefit the innovators and customer-focussed players in the industry.
The online invoice payment provider Klarna is an example of a fintech company that, most likely, will benefit greatly from PSD2 by placing itself elegantly in customer purchasing processes. As a result of PSD2, Klarna will be able to receive information about customers’ disposable funds in their current financial institution and offer to finance the remaining amount over 12 months at the exact moment of purchase. It is not necessarily impossible to do this today, but the new possibilities with PSD2 mean that it is now perceived as a far more streamlined process for the customer – and completely without having to contact the customer’s current financial institution, except for a query.
Another example is Yolt (owned by ING), which is changing the way consumers think about money. Their solution synchronises all of the customer’s accounts into one image, collects all the registered expenses and makes it easy to make budgets, international money transfers and energy comparison across financial suppliers.
GDPR and PSD2 are two regulations that will go hand in hand for good reasons. PSD2 means being able to get in the driver’s seat purely in terms of data – the customer decides who uses data and where data are to be used. However, this places new demands on data recipients and data processers and here, there will be a completely new and very interesting regulatory task in the future. Therefore, banks still have a very special role as a trusted party. And in the future, they can act as a “data bank” in the arena, particularly because banks have built up comprehensive and adequate compliance competences over many years. This role is still needed and may end up constituting the actual backbone for new players.
A major challenge with PSD2 is still the lack of standards. This has resulted in the European expansion halting, while the corresponding service in the UK has already taken off, as standards are already in place there. The newly published Regulatory Technical Standards (RTS) only indicate technical framework conditions and no interface standard. In order to help fill this gap, the collaborating players in the so-called “Berlin group”, consisting of almost 40 banks, associations and PSPs from across the EU, have defined a common API standard called “NextGenPSD2” for relevant user scenarios that are specified in PSD2. Initiatives are also underway in Poland (PolishAPI), Slovenia and France (STET). However, there is no common approach to standardisation yet, which could result in the European development being slowed down.
The big question is whether we will see a liberalisation of data corresponding to PSD2 in a range of other industries. Here, we are thinking of e.g. life and pension, P&C insurance, health, telecommunications or energy, which many executives in the banking industry are calling for. If we connect them together with third-party players, there are suddenly completely new business opportunities and models at play.
Our way of paying has evolved drastically in recent years from exchanging goods to fiat money – and now being in an increasingly digital world. Research shows that consumers enjoy shopping, but experience “pain” when performing the payment3. The concept of passive consumption or invisible payments was therefore an important theme at Money20/20 in Amsterdam 2018. Rather than asking customers to pay at the time of consumption, pre-paying or paying later decreases the perceived pain. This trend has been increasingly adopted, and we predict that it will increase further in the near future.
There is no doubt that data and technology are vastly changing the landscape of banking, the financial sector, societies and the world. Increasingly, AI is becoming a must-have rather than a choice, and we see that this trend is continuing. However, a common viewpoint at Money2020 Europe is that AI is still in its early days and we are yet to see the full impact that it will have on our lives. As mentioned by Apple co-founder Steve Wozniak:
We are a long way from when artificial intelligence can understand the thoughts and emotions from walking home after a night with friends, while feeling a warm summer air breeze on your face.
All these trends show that the financial sector is changing – there is an increasing focus on customers, new players are entering the sector and regulation is constantly affecting the playing field. Currently, it is our qualified guess that this is only the beginning of a large movement across the sector. In order to stay ahead, the financial services company of the future should consider how to respond to these new trends and developments to ensure that it stays relevant – now and in the future.
1Analysis presented at Money2020
2According to numbers from Ant Financial, including strategic partners
3Zellermayer, O. (1996): Pain of paying & Raghubir P., Srivastava J. (2008): Monopoly money: The effect of payment coupling and form on spending behavior.
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