“So who do you bank with?”
How the value prop narrative of banks is changing
Financial services are evolving. The industry is becoming more reliant on technology to deliver quality customer experiences fueled by more efficient back-office environments. New market entrants, known as FinTech startups, are offering crisp value prop narratives that compete with legacy bank offerings in speed, efficiency, and accuracy. As a result, banks are no longer monopolies; the supply chain has evolved into a much more complicated macro structure, consumer demographics have changed as the focus shifts to the millennial market, and designing friction-free user experiences have become the new gateway to innovation. In the large scope of things, the underlying value proposition of a bank is changing to one that is perhaps less compelling to the banks, but more inclusive and meaningful to the consumer. This post presents my latest thinking on the future role of the bank in an evolving digital world.
When Finance Meets Technology
It takes 2–3 days for your account balance to settle a transaction, 5–10 days to send money overseas, and 15–30 days for a bank to approve or decline your mortgage application. Living in 2017, you may wonder why these transactions aren’t yet instant.
While technology has developed in speed, accuracy, and capacity, banks have yet to catch up to emerging tech trends. Part of this has to do with the regulatory environment they must operate within, but also, with the way their IT systems are designed. In more technical terms, it’s the comparison of a bank’s mainframe computing system versus a FinTech startup’s cloud infrastructure — it’s about close-looped (current bank) vs open source architecture (future bank). Today, only one large scale initiative by the name of PSD2, has been launched to transition, suggesting that we are in the very early innings of this major transformation, but I do believe that if successful, it’s an example the world will learn from. PSD2 isthe first regulatory directive of its kind lead by the European Commission for the purpose of scaling bank architecture to something that is more meaningful, powerful, and inclusive to all stakeholders.
The open source banking movement will fundamentally change how we think about the banking ecosystem, all the way from customer interaction to the economics behind back-office operations. Banks are not going anywhere anytime soon; they will still power the same financial products we use everyday, but the delivery and implementation strategies of those products will change. Open source architecture will lower the barrier to entry, encourage innovation, and motivate entrepreneurs to get involved. Being the backbone of Financial Services, banks will focus their attention on what they do best and act as an infrastructure layer. As their attention shifts to this new role, they will lose sight of direct interaction with the consumer, causing them to lose their client-facing brand. In the end, banks will be data companies that just happen to be in the banking business. And from there, the global perception of what banking is and which players are involved will change.
Drivers of the Open Bank Environment
Banks are positioned to be infrastructure banking companies, but the environment will be much larger than just that. Banks as infrastructure companies will only make up one piece of the future open banking environment. The relationship dynamics within the supply chain must have some sort of merit, and consumers still need a way to interact. Here is how all three come together:
- Infrastructure: The new bank infrastructure will be built on open source and widely decentralized technologies. Today, Blockchain is the best example. It will allow banks to redesign each of their main functions as a decentralized application (known as Dapps to the blockchain community) — this includes capital markets, mortgages, insurance, payments, etc. Already, Ripple and Nuco are two fintechs leading this space.
- Supplier-side: As the supply chain evolves, strategic partnerships will be formed to offer the user a friction-free experience. Great communication protocols must be in place to reduce friction down the supply chain. The concept of open source application programming interfaces (APIs) have been around for a long time, but never in the banking industry for many reasons beyond this post. The future will involve APIs as the main form of communication between different players in the banking supply chain and will be the foundation for building great IT communication protocols for the banking environment. For more information, Token is a great example capitalizing on the PSD2 directive in Europe.
- Client-Side: Chatbot powered AI will be one of the most powerful ways for consumers to interact with the banking environment. Today, most chatbots are built on social media platforms like messenger, slack and sms, and so, it leads us to think that banking will become more social and also user-friendly. Social media won’t be the only way to reach consumers, but it does represent a large identity gap in the making. The future of client-side banking will be social banking. Finn and TalkBank are great examples who have already established strategic partnerships with banks.
So much will change in the next five years alone, and as a consumer, you may start to forget who you bank with. Not because you want to, or because you will be unbanked, but because you will be interacting with the banking environment in a whole new way. You’ll be checking your bank balance and paying your bills through Chatbots on Facebook Messenger (Finn.ai, TalkBank) or sending money to family and friends using third party loyalty-enabled digital wallets (Venmo, Circle, Coinbase). Before you know it, you might just be lucky enough to bank with Facebook, Amazon, or Google. And greatest of all, it won’t be because they’re regulated to manage your chequing or savings account, but because the open source banking environment will de-regulate the industry providing outsiders with enough incentive to get involved.
Banks have always been and will remain as the foundation for global capitalism, but the next time you’re asked, “Who do you bank with?” you may have very good reason to say, “I bank with Facebook.”
I am very interested in hearing the perspectives of the global community. If something in this post resonated with you, drop me a line and let’s get a conversation going.