Banks have come a long way since the gunslinger Wyatt Earp rode shotgun, providing security for Wells Fargo’s armored, horse-drawn carriages. The heavy steel vault, the marble foyer, and mahogany counter with the smiling clerks are relics of history.
The old way of banking, where the neighborhood bank was the only source of capital for business and the traditional choice for local people, has changed because of all the mergers in the industry, particularly in the USA.
Now, there are new threats to the old way of doing business, such as the ubiquity of the internet, the proliferation of smartphones, the spread of alternate payment types, the emergence of digital identities, and the increasing adoption of big data.
All of this is changing the role banks play in society. While some will adapt to the new environment, others will go out of business, and, in many cases, new kinds of financial companies will step in to take their place.
What will the future hold for banks and how will technology empower or devour them? Predictive technology and big data, blockchain and alternate currencies, mobile and wearables are influencing money transfers, customer service and also digital security.
What are the major opportunities for banks following the digital trend?
In Europe, Asia and Canada, government, businesses and the public are seeing the advantages of using one digital identity to interact with both the business sector, as well as the government. The financial sector is a logical place to issue such credentials, since banks excel at flushing out fraud and doing due diligence to verify a person’s real identity. Norway and Sweden have already delegated the task of issuing and administering digital ideas to the financial sector. Banks in other countries are stepping up to do this themselves.
Even those in the USA who oppose a single overarching digital ID are already using one or a few. Google, Facebook and Twitter user IDs are becoming national IDs of sorts, since you can use them to access a multitude of web services. It seems that both the government and the banking sector are not far from rolling them out as well.
The logical extension of this concept makes it possible to consider that currency and identity could merge into one identity, if government regulators do not block that. With blockchain currencies, like bitcoin, the currency and the identity are the same. We are already at the point where money exists just as a number in a computer, tied to an account number, rendering paper obsolete.
According to industry analysts, digital identity solves the problem of fragmented identities. Bringing some cohesion to that will provide the banking sector with new opportunities, as well as new social responsibilities.
When one thinks of a financial concierge, one usually thinks of private banking that caters to the wealthy. Their stance has always been: middle class individuals need not apply.
But all that is changing, as predictive analytics, user tracking and machine learning will allow financial institutions to make on-the-spot credit decisions, for example. Both customers and the bank benefit from this when, for example, a customer who is overextended on their credit card is given authorization, instead of facing an embarrassing decline when they go to pay the restaurant bill.
The concierge could also use analytics to offer up targeted loans and products, based on the customer’s past behavior. That could mean financing the customer’s next vacation or car loan, just when customer tracking shows consumers are looking for these services or goods. The key is to use these technologies in a non-invasive manner, and focus on assisting and helping the customer, by staying service-minded with respect for their privacy
In addition to mining their own data to provide concierge services to customers, banks will leverage data obtained from other providers. Banks are already purchasing web tracking, purchasing, lifestyle and other data from data brokers, other financial institutions, and retailers. Big data analytics helps banks mine all this information in ways that will help them gain new business.
Financial education for the rising middle class
Education is closely tied to the potential that a virtual financial concierge has. It involves analyzing spending patterns or investment interests / opportunities and providing customers with better options for savings and investments, to reach their own defined goals for example. This in turn provides new opportunities for financial institutions in managing smaller individual funds, whilst having a larger total user base, and can also change people’s perspective on interacting with a virtual account manager.
Alternate Forms of Payment
The days when consumers paid for everything with bank-issued Eurocard, MasterCard, and Visa credit cards are over. Now, those quasi-monopolies are not monopolies anymore. Everyone from Apple and PayPal to a host of startup companies are offering up new kinds of payment systems, as they battle to see which technologies and payment methods will come out on top.
These new payment devices and services compete with banks to some extent, as banks will be less involved in processing payments. Credit card companies are responding to this challenge by rolling out products and services to facilitate electronic payment, like Verified by Visa. They are also trying to guide the technology with the PCI council, by writing security standards for EMV chip-equipped credit cards, POS terminals and digital wallets.
Considering that, in this market, a single bank could be seen as a small player, it probably won’t be beneficial for this particular financial institution to issue their own Android or iPhone app and hope consumers will adopt it for payments. Instead, the future lies in joining consortiums of banks, as well as other companies who will compete together for a larger audience and the lucrative fees and commissions associated with processing payments. As a bank, you can compete with or join the software and hardware companies like Google Wallet, Apple Pay, and PayPal. Either way, the market will grow, but it will also become a fierce playground for innovation.
Expats, nomads and people that spend more time in a country they were not born in, are now the 5th largest “nation” on Earth and estimated to rise even more in numbers over the following decade. The movement of people across borders creates many opportunities for banks, placing them in the unique position of helping customers deal with currency fluctuations and finding ways for them to move money without paying outlandish commissions to the traditional transfer agents in that business.
People abroad frequently transfer money and are used to paying high fees to transfer agents like MoneyGram and Western Union. Those old style companies charge around 5% fees, but they are now surrounded by competition due to internet companies stepping in. TransferWise, a new company backed by Sir Richard Branson, among other well-known names, is breaking records in these markets. They promise to get rid of the high exchange fees by changing the operations model of currency exchange. PayPal as well, though not focused solely on exchange, operates as a giant, unregulated international bank, making direct deposits into bank accounts in different countries. Traditional banks probably wonder why they can’t operate in a similar manner across borders, without the oversight of banking regulators, and how they can adopt innovation easier and faster.
Banks are very well positioned for these types of services, and can use their position to support these international transfer market and currency exchange better than smaller players. Using analytics, monitoring currency markets and having insights into the behavior of their customers, a bank can help its international client base with moving money across efficiently.
In sum, competition from new currencies, new payment processors and the speed by which business occurs due to the speed of the internet will create opportunities for banks. The way that they engage with the broader notion of culture will have to change though. Their entire role within the society of the future needs to adapt and transform, away from just financial products.
9 November 2023
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