Banking’s digital future

Start-ups working to challenge the legacy companies of the finance industry are collectively known as “fintech” – short for financial technology. The rise of these challengers illustrates how it's possible to see disruption coming and yet struggle to deal with it.

Venmo, Paypal and other payment services offer seamless money transfers, challenging traditional banks. Yet at the 47th St. Gallen Symposium, top bankers saw increased competition as a positive development. Several were more worried about internet giants like Facebook, Google, Apple, or Alibaba moving onto their turf. “My view is, we should be very excited about the potential for disruption,” says John Flint, chief executive of Retail Banking and Wealth Management at London-based bank HSBC. In the past decades, banks competed around product complexity, leverage, physical distribution networks and in the dotcom business. Fintechs have put the consumer into the midst of the next round. For established banks, the solution is clear: Hire former fintech staff, relaunch their own banking apps, and sometimes simply copy the latest trends to keep pace with finance’s avant-garde.

Fintechs have put the consumer into the midst of the next round.

“Fintech will educate customers on new experiences in finance,” says Neal Cross, chief innovation officer at Singapore's DBS. “Second, it softens up regulators. They now talk to start-ups, retailers, and tech companies.” But fintech does not solely benefit customers. It’s helpful for banks, too: A subfield of fintech, called regtech, for regulation technology, uses soft- ware to keep up with the latest regulations. “There is no way humans can keep the increasing amount of regulations in their head,” Francisco Fernandez, CEO of Avaloq, an IT-provider, says. Fernandez recently opened a new bank account. He had to fill out 81 pages of forms – on paper. With the help of a web crawler, his personal information could have been gleaned from Facebook or LinkedIn. Biometrics such as his fingerprint, retina scan, or face could serve as identification, ensuring the bank is in line with anti-money laundering regulations. In India, for example, regulation is ahead of Europe. DBS Digibank, a subsidiary of DBS, took advantage of that: To open a bank account, customers download an app, go into a coffee shop, give their thumbprint, and are done. The procedure brought in a million new customers in less than a year.

“Fintech will educate customers on new experiences in finance.”
Neal Cross at the 47th St. Gallen Symposium

The real threat to the banking industry is not from start-ups but from established internet giants. Apple has launched a payment service called ApplePay in the US, in 2014 and is now moving into European markets. Facebook is pairing up with Transferwise, an international money transfer start-up, to potentially move into finance, too. “When you already have a billion customers, you can be in any business and be very successful,” Cross says. “Don’t forget, these are the firms that invented digital in the first place.”

Cross sees a misunderstanding in most industries around disruption. “In the finance industry, most people think banks need to move into the digital world,” he says. “The real issue is that the digital world is moving into banking.”

China may be the best place to spot the real threat. A non-bank such as the Chinese e-commerce giant Alibaba, the world’s largest retailer, has attracted 400 million customers for its payment service AliPay. To avoid fighting a battle you cannot win, Cross suggests pairing up with the internet giants. DBS already partners with WeChat, a social network owned by the Chinese internet giant Tencent, which has close to 1 billion users.

“The real issue is that the digital world is moving into banking.”
TED-talk by Henri Arslanian on how fintechs will shape the future of banking

However, most of the newcomers’ activity is focused on payments. Venmo, PayPal, ApplePay and WeChat have neither a banking license, nor the ability to offer a broader range of products than a payment or expenses-management app, let alone a real bank account. For John Flint, the challengers are just a potential threat. “Moving money around is not the same as looking after it,” Flint says.

According to Flint, the industry hasn’t had a real problem with start-ups, because payments represent just seven to ten percent of global banking revenues. “China is the only place in the world where fintechs really work”, says Cross. According to him, 52 percent of all payments by volume done in China are done using fintech, but by value they represent less than ten percent. “If you are doing a large payment, you are using traditional methods,” he says.

“Moving money around is not the same as looking after it.“

Banking is now learning a lesson in competition. Usually, banks charge borrowers a higher interest rate and offer a lower interest rate to lenders. The low interest rate environment shrank that profit margin. And some startup banks offer basic accounts for free, increasing competition. To keep up, banks imitate low-cost airlines and offer services around their basic product – for example, investment alarms, or a feature to store passwords or a will.

But if everything is broken down by technology to a nice banking app and handy features that are easy copied, where is the unique selling point for a bank? “It comes back to something that you find very boring: The quality of customer service,” Flint says. “The substance of what we do is not going to change.”

Cross has three visions for the future of finance. The first, and by far most unlikely, scenario is that there are no banks in the future, and we move to a blockchain model where everyone’s net worth is stored on a decentralised system.

In the short term, banks could work more with fintech companies, telecoms, and retailers, creating a better experience for the customer. Banks might even become the plumbing of finance – they just do their job but customers don’t see their brand.

In that case, low-level clerical jobs might disappear. But “you will still have skilled bankers, people exercising judgement,” Flint says. “The real bankers – the ones that need a degree from St. Gallen – will stay in demand. Technology will not replace that.”

“The real bankers will stay in demand.“

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