The Strategist

The New Competitors

03/27/2015 - 14:30

The digital revolution shakes the foundations of credit institutions, forcing them to create more innovative products and become more loyal to customers.
Currently, banks are at a crossroads. The digital revolution now transforming almost every aspect of our lives and in many ways it touched the banking industry too. According to bankers, writes the Financial Times, it shakes the foundations of credit institutions, providing new opportunities, as well as creating a threat.

Numerous competitors, such as PayPal and Google, create innovation in the digital space on banking activities, simplifying it and depriving the banks of the profits. For example, Google has recently launched a plastic debit card that is used by millions of consumers in Google Wallet, whereas in many countries, PayPal is ranked first in the provision of online payment services. Even retailers such as Starbucks steal a "piece of cake", providing an opportunity to pay for purchases using a loyalty card.

The danger for banks is that these new digital companies create significant competition for the main types of banking services.

At the same time, banks can find an opportunity in use of digital communication tools such as smartphones and tablets, and in significant advantage in providing their services, which mean much more than just payment for goods. At their disposal, banks have a wealth of information about consumer transactions and their buying habits. Combining these data with personal information from other sources, such as social media, they are able to provide high quality services to customers.

Meanwhile, with regard to the rivals themselves, the digital technology is certainly possible to create many new innovative banking services to consumers. However, the other side of the coin are the profound changes in consumer behavior. Young, tech-savvy, who grew up in the era of smartphones and tablets, they become less loyal and more demanding than ever.

These customers want to be able to buy things or put money into savings accounts with cheap, affordable digital technology. They expect it to happen instantly - just as quickly as they can pull the cell phone out of his pocket and click on the submit button. According to some estimates, over the next five years, at least three out of four customers will interact with online or mobile banks, whereas less than 5% will come branch offices in person.

Therefore, when it comes to financial or other transactions, digital consumers expect understanding of their needs from their service providers, as well as great deals and good pricing policy. The leash on which companies hold their clients should be easy, instant and enjoyable. All of this creates huge problems for the banks, not least because many customers do not like to communicate with their bank.

The real problem of credit institutions is not only being eager to change the existing banking products and services, making them available in the mobile and digital form, but also how banks must change ourselves to become part of this new digital age of much closer relationship with customers formation. In principle, many banks already offer mobile deals and digital services.

However, much of the most interesting innovations passes by banks, as alternative financial companies often provide non-financial products too: from assistance in finding the best deal by providing real-time data, such as discounts and special offers on products or services, to direct counseling. It is worth noting that most of these innovations are created and implemented in emerging markets rather than developed countries.

The revolution in communications and IT, which took place in the last 15 years, could not help but affected the financial sector. There are new opportunities, primarily to reduce the cost of procedures and payments, and, as a result, increased competition. Therefore, the expert said, the flow of innovation in the financial sector and the development of non-banking sector will continue for at least 5-10 years. In the future, non-banking sector will be able to bite a good chunk (10-20 percent) of the traditional banking.

Another issue is that the new sector is unlikely to completely push traditional banks away. Firstly, they are not standing still. Secondly, there is a huge temptation to assign those, who began working in finance area, to assign their money. Most often, it ruins the latter-day financiers. Banks, for all its shortcomings, work according to strict rules and, of course, fleecing customers (fines, unnecessary services imposed on loans, hidden fees, etc.), but not all at once, and little by little.

Meanwhile, investors also understand the prospects for companies involved in the development of such technologies. Investments in companies specializing in financial technology, according to Accenture, in 2014 tripled to $ 12 billion. So little surprise that banks are unhappy with this development. According to the managing director of Accenture Julian Skan, it is not easy to look up to such companies. He claims that seventy percent of bankers surveyed by Accenture does not have a clear and holistic approach to digital innovation.

However, banks are also making efforts to strengthen their positions. Most interesting is that not everyone is ready to develop, as one man intend to bring justice to the offenders. Non-banks, loaning to companies and individuals, creating additional risks that is noted in the Association of British banks. Credit institutions are required to weigh on risk loans meanwhile non-bank institutions - no. They urge the concerned authorities to extend banking regulation on alternative lenders.

It can be assumed that many regulators will impose restrictions on such companies. But the banks themselves still have to keep up with the times. This requires the rapid development of competitors, and there is no getting around it. In the UK, the market for peer-to-peer lending in 2014 crossed the mark of 1 billion pounds and continues to grow at a rate of over 100% per year. In the United States, average loan size for P2P loans is about 10-15 thousand dollars and the interest rate at the level of 15-20% per annum.

Virtually, this is direct competition with banks. One of the facts, confirming what is happening, is the fact that now, for small and medium businesses, it is often much easier to get a loan in the MFI or at the site of peer-to-peer lending. The number of required documents will be much lower and the interest rate on this loan is comparable to the actual bank rate. That is not the one that is listed in the brochure, in the contract with all its conditions.

So that new technologies, especially in the field of communication, really erode the value of the services of banking institutions, but banks are not hurrying to adapt to new demands of customers.