Banking : Winds of Change
Note: This article has been written using references mostly from India from where I am based, but similar trends are there across different geographies with some regions like Europe, UK and Australia well ahead in their implementation and other regions catching up soon
Banks are interesting institutions in that almost anything can impact them — changes in technology, economy, fiscal actions, regulations, data privacy, security markets, trade deals, climate change, cyber security, customer expectations — and such. And yet (or maybe because of that?), banks are some of the most enduring institutions in an economy.
All factors remaining constant, this article provides a couple of macro trends that banks might be seeing today given the changes in competition, regulation and customer expectations, and how they can adapt. While many of the other factors mentioned above might themselves need a much longer discussion and speculation, I have kept the scope of this article very limited.
Headwinds
Declining Distribution
A long-running trend across industries, geographies and over the times have been people and organizations increasing their specialization and becoming more narrow in their focus. One big reason for this trend has been consumer needs becoming more diverse and consumers themselves becoming more demanding from their service providers giving rise to nichification of products and experiences.
Banks however have bucked this trend and remained similar in their form and function over time. While the origin story of different banks could be stemming from a once-held niche, they all converge to similar end states. Some reasons could be that regulators prefer standardization, or that banks grow by hiring people from other banks so end up having similar views and modes of operations.
Banks are also keenly aware of this, and are trying a variety of things to improve customer experience — from converting branches to lounges, to coming up with multiple versions of the same product to cater to different customer segment. However, these efforts will be running into headwinds of banks becoming less of a destination and more transactional.
The new destinations are the companies and apps that are focusing on single use case (niche) problems. While banks will keep trying to address changing customer expectation, on the distribution front they will start competing with products who are solving very specific problems, like crop price discovery for a farmer, new demand generation for a fleet owner, or CRM for a solopreneur. Many of these use cases have a financial transaction as part of their workflow and this is where these apps can better distribute the right product at the relevant time in a seamless manner compared to the banks.
Not only that, banks are going to be at an inherent disadvantage when looking to distribute products on their own since these distribution app companies have the ability to spend much more for customer acquisition. They can not only employ more techniques for acquisition (risk capital infused inorganic growth, network effects from product usage, referral incentives, novelty factor), they can also spend more on CAC since their revenues will depend on other sources of income as well like charging for convenience, selling data to advertisers, and such. Banks typically don’t (and in most jurisdictions can’t) do that.
Brand Irrelevance
Since banks are not owning the distribution, the part of the transaction they are involved in is being increasingly getting commoditized. Technology companies keep pushing on this front — payment gateways in payments, open banking platforms commoditizing integrations and Data-As-A-Service companies providing transactional data. At the same time regulatory trends like UPI, PSD2, Account Aggregators, and other such initiatives are further forcing the banks to be interoperable. This time is almost reminiscent of the telecom industry when number portability reduced the friction to switch from one service provider to another, and a lot of legacy companies with no differentiators started to see declines.
In addition, with number of banks increasing (more than 100 banks in India) and each bank coming up with many versions of the same product, the discovery of these products are increasingly being done on aggregator sites who provide better range, user experience, discoverability and promise of finding the best product that suits the requirements. Just like with rise of more news sites on the internet gave prominence to search engines and news aggregator and publications started to lose prominence as stand alone brands, similarly product manufacturers might start to lose prominence as the product becomes commonplace.
Tailwinds
In these changing landscapes, banks then need to double down on the strengths that they have — strengthening relationships and providing unique and custom solutions for large customers, and becoming an infrastructure provider to the companies who are doing a better job at distributing the financial products.
Relationships
One segment where the app companies have not found a differentiating distribution model are mid and large corporates. Large enterprises often have very different and unique requirements for a generic product to be built and distributed at scale, and at the same time the distribution process is very similar — through enterprise sales, problem discovery and relationship building. So unlike in other segments, banks don’t have any inherent disadvantage to cater to large companies directly and will in fact have advantage in terms of large companies being more comfortable with banks directly. Similarly, banks should partner with the app companies to help them provide a better and more efficient way to distribute their products.
Infrastructure
For the other customer segments — small businesses, retail consumers and such — banks can become infrastructure providers to the apps who are serving to these customers rather than competing with the apps for distribution. The apps would want to focus on their use cases and not worry about the regulatory, compliance and all the components of the financial network.
So far, banks to a large extent, have seen most partners as lead-gen opportunities trying to control customer experience once a lead is acquired. This will flip with the distributors partnering with banks to use their infrastructure. Here, the banks who have the best scale, integration possibilities and are developer focus will win. Just like AWS got a head start with providing cloud based infrastructure with other companies playing catch-up, those banks who can adapt early will benefit.
So bottom line, app companies have a better ability and visibility to solve specific problems of their target customers and are comfortable building and distributing niche solutions. Some of these solutions have financial transactions as part of their workflow. Financial service providers should start to look at themselves as finance infrastructure companies and invest heavily today to get a pole position. 🏁
