Banks are changing — and so should we

The world is slowly on a road to a cashless society. The debit card since the 70s, online banking since the 90s, and mobile payments since 2014. Are we prepared to refrain from the precious paper?

Fewer branches save money

The traditional banks, for instance, HSBC, BPN Paribas, Barclays, UniCredit, and many more are getting challenged by their young and more innovative peers. Digital banks that usually fully operate online are drawing the mass attention of clients and venture capitalists. Teenagers and young professionals are the primary targets of such businesses.

It is not only the features like free money transfer to other currencies or free ATM withdrawal in any destination but also the personalized savings account or the AI that monitors spending habits. A remarkably beautiful and easy-to-use mobile app is where the clients use all the features. For a company to offer such perks, digital banks had to redesign its business model, to cut costs as much as possible. One of the most effective ways is to exist only in the digital workplace, meaning no branches or offices with tech support constantly available via phone, e-mail or webchat.

The biggest online banks have millions of users. Image by John Detrixhe by Apptopia data [1]

The growth of these companies is astonishing, with many attracting hundreds of thousands of users in the first year of release. And it is not only customers who are on an active look-out. Venture capitals (VC) are pouring enormous investments into the digital banking sector. The pace at which the investments exponentially grow is similar to start-ups like Uber. And while we may discuss that Uber’s quarterly earnings are in red numbers, with losses in billions of dollars, we can’t overlook the fact the Uber revolutionized the automobile taxi industry. Similarly, digital banks will continue to jeopardize the dominance of “traditional” banks in the foreseeable future.

Revolut, one of the most dominant digital banks in Europe, has no trouble with funding. Source: craft.co.uk [2]

After analyzing this trend, one may ask a question on how will the traditional banks react and whether they go extinct. Turns out that banks are well aware of the fact that having a physical branch in every neighborhood is ineffective and financially harmful. Consultancy firm McKinsey in their report stated that the top 25 US banks reduced the number of branches establishments, in the last decade, whilst managing to grow deposits. Subsequently, many long-established banks will try to either copy or acquire digital banks. Dutch ING bank has already developed its own digital bank named Yolt. With hundreds of thousands of users, the initiative expanded from the UK to Italy and France in 2018. The second-largest Spanish bank by global assets, BBVA, has acquired three different digital banks in the US, the UK, and Finland, with the British one being Atom bank. Atom has inflowed £4.4bn of deposits gross value since its launch in 2014.

Digital banks often focus on a low-fee policy which attracts new customers [3]

Another result may be that banks will try to diversify their platform, offering more services for their customers. Deutsche Bank’s report suggests that robo-advisors would be able to hold billions in assets by 2025 and more traditional banks may be looking into this sector.

“The banks must revolutionise its business because the world is changing” — Deutsche Bank CEO, John Cryan

All in One

An interesting phenomenon slowly leading to the paper-less economy is happening in China. WeChat, a Chinese multi-purpose app, was released in 2011. In the second quarter of 2020, the app surpassed 1.2 billion monthly active users. And it is not only the users' statistics which surges but also the number of businesses which rely on WeChat. Combining Facebook, What's App and a banking app is what makes WeChat useful, impressive, and attractive. Another mega app is Alipay, an online payment app, with a billion active users.

In 2016 Chinese consumers spent 9 trillion USD in mobile payments, seventy times more than the US consumers. Most of the consumers’ money is spent on food and services, where WeChat payments are preferred and more popular and cash or card.

China is a leader in mobile payments, with nearly double the percentage as the runner-up Denmark. The Western economies are struggling. Source: Statista [4]

It is the notion that mobile payments don’t require a handful amount of downloaded mobile apps, but just a single one, is what drives the Chinese market the most. Nowadays, people chat, pay for a delivery, and rent a bike using the same app. As the volume of people with access to the internet in China skyrocketed after 2006, and the cost of smartphones dropped, the mobile payment industry started to soar.

How should we adapt?

Financial technologies are facing major potential threats, not in terms of security or competitiveness, but in terms of privacy. Since June 1st, 2017, China Internet Security Law is implemented, giving an upper hand to the government agencies to obtain companies’ user data for national security. Tencent Holdings, the media giant, and WeChat’s creators stated that they do not keep chat histories nor do they analyze WeChat’s data for commercial use. When it comes to sharing the records with the regulators, the law suggests otherwise.

It is important to understand that while digital banks offer many benefits, similarly to e-shops, they collect a lot of data points. Compared to Facebook and other social media, the collected information is generally more sensitive, such as shopping habits, favorite brands, prepaid online services, and more. Having this knowledge for commercial use, or selling this data to the third-party firms, is much more tempting than the government’s security. This brings many questions, such as if we shouldn’t actively demand tighter regulations, companies’ transparency, and be on a dynamic look-out if our personal data is not being misused.

E-commerce is the catalyst for the banking sector [5]

Final thoughts

The change in our society is visible but not obvious. We are slowly, but surely on a road to a wallet-free culture, with banks not only digitalizing their products but also themselves. Ultimately, leading towards greater competitiveness in the digital market which the customers would benefit from the most.

Yet, the risks of data exploitation are immense and must not be belittled. With active regulatory authorities and thoughtful society, however, we can ensure safety and security.

Sources:

[1] https://theatlas.com/charts/fEUDn6qPg — thank you so much for this infographic!

John Ethan Detrixhe !thank you, please get in contact with me if there are any problems with attribution or if you like my story! :))

[2] https://craft.co/revolut/metrics

[3] https://www.emarketer.com/chart/232366/what-do-us-internet-users-value-most-about-their-bank-of-respondents-oct-2019

[4] https://www.statista.com/statistics/244501/share-of-mobile-phone-users-accessing-proximity-mobile-payments-country/

[5] image: Freepik.com, by rawpixel, https://www.freepik.com/free-vector/people-shopping-with-credit-card_3585402.htm#page=1&query=fintech&position=44

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