The Financial Services industry is changing dramatically: traditional Banks are struggling to keep up with the changes affecting this the sector. When I speak with some of my clients in FS it is not unusual to hear things like “Fintech is not a real threat as big financial institutions like us have the legacy and the banking licence. We cannot be swiped away by small newcomers“. I often reply that I would not be so complacent. In fact, regulations change quickly as the changes introduced by the Financial Conduct Authority to the banking regulation and authorisation process, in addition to the Payment Services Directive 2, show they can change the industry landscape to increase competition in the bat of an eyelid.
In this post I am going to summarise the main disruptive trends that are affecting Financial Services. Being aware of them and taking action is mandatory in order to stay competitive and not being like the frog that is comfortable in the pan full of warm water and ends up being boiled when the temperature of the water is turned up as it got more and more comfortable with the status quo.
The pace of change has increased in all industries. Also highly regulated sectors like Financial Services are not immune. Here are the trends that you have to be aware of:
- Sharing Economy and Small Mobile Payments: nowadays most consumers are accustomed to peer-to-peer services like AirBnb and Uber. They want simple, fast, cheap and hassle free transactions. Most individuals are using their mobile devices to pay for small sums of money and companies like Apple are making it increasingly easier: I can waive my iPhone over a terminal and make the payment in few seconds (contactless payment). Just a few days ago I received an email by Apple informing me that the new IOS10 allows me to make small payments via Siri, the Apple voice control system. When I compare these options with the ones offered by my “traditional” bank – that requires the use of a card, the use of a security code and requires at least a couple of days to show the operation on my statement – well, Apple’s option looks far more appealing. Additionally, I trust Apple as I have used their laptops and mobile devices for ages. The fact that they are not a traditional financial institution is not an issue as I already trust them.
- Fintech Companies: this stands for financial technology companies. They are a “new breed” of start ups that are meeting the changing purchasing habits highlighted in the previous point above. They meet customers’ demands for simple, fast, cheap and hassle free transactions. Companies like Simple, Klarna, Digit, Fidor, Vento, Nutmeg, Square or TransferWise may be unknown to the big public, but if you work in Financial Services you better get accustomed to what they do as they are your big competitors, regardless the small dimension and recent incorporation date. And if you think that Bitcoin and Blockchain is just a fad, I would urge you to reconsider your position.
- Regulators: they are focusing on more transparency and on increasing market competition. In particular they are putting pressure on banks to cut the very lucrative fees they charge when processing payments. On the other end, they are opening up to more competitors (namely Fintech companies) with the Payment Services Directive 2, that will have to be adopted by the European Union members by the beginning of 2018. This Directive (known ad PSD2) will allow Fintech companies to operate in areas that up to recently were exclusive remit of the banks, by allowing non-bank service providers to collect customer’s data and aggregate it to provide, for example, a series of information about their spending patterns and fees they are charged by “traditional” banks. This means that companies like Google, Amazon, Facebook and Apple could combine an individual’s financial information relating to different accounts into a single site and provide payments services directly from it eating significantly into the traditional banks lucrative revenue streams.
- Cross Border Money Transfers: this is typically an area where traditional banks make lots of money due to the fees they charge to their customers to process the payments. The operation itself is slow as it usually requires a few days to be cleared. Comes ATB Financial, a Fintech company based in Canada, and the landscape is changing dramatically. Just a few months ago they were able to transfer 1000 Canadian dollars to Germany’s Reise Bank in about 20 seconds using a platform developed by Ripple (a company that specialises in Blockchain). Yep, only 2o seconds. This poses a massive challenge to traditional banks that charge hefty fees to complete transactions that are now perceived as slow, expensive and cumbersome. As we have already highlighted costumers nowadays expect a seamless hassle free experience.
- Cyber Attacks: the increased use of online platforms, mobile payments and new technologies is leading to an increase number of cyber attacks. This is an area that poses challenges and risks that may undermine customers’ trust when it comes to using new forms of payments. Cyber criminals are getting more and more sophisticated.
But is it all bad news for traditional banks? No, it isn’t. It depends how the executives of a financial institution deal with those trends. If they are perceived only as challenges and threats the outcome will be very likely bleak. But if they are perceived as opportunities to step up their game they are a great opportunity for traditional banks to be the leaders of the future. True, big financial institutions have issues such as legacy, massive headcount and intricate processes and interdependencies. But they also have massive individual’s financial data and trust that newcomers, in most cases, have to build from scratch.
It all goes down to attitude and company culture. Who would have thought that the biggest hotel brand in the world would be a start up that does not own any of the properties it offers to its customers? Welcome to the AirBnb age.