What about the future of banks?

In recent years the global financial system has faced a number of challenges. Technology has allowed the emergence of solutions that challenge the hegemony of financial institutions. We have scenarios such as the emergence of fintechs, the creation of crypto-coins, expansion of technology companies and new regulatory scenarios. After a series of lectures and readings, I decided to write about what may be the future of banks and some of the challenges that these institutions face.

The financial system is complex, with a large value chain, with a series of processes and services. Banks act along this long chain, which means high fixed costs. These times are over and the inefficiency of this type of structure has become evident, which has provided a great opportunity for entrepreneurs. Combining the advancement of technology with this new scenario, a number of new companies came to optimize some of these processes, the Fintechs.

Unlike banks, which act on a large part of this service chain, these new companies innovate by working on specific parts of that chain. As part of payments, insurance, investment, etc. This strategy, coupled with the extensive use of digital systems, allows greater efficiency gains in process and cost savings. In addition, by focusing on one part of the chain these new services become more user-centric. In the end, these benefits are passed on to end users through better and cheaper services.

In this new context, services, previously almost exclusive to large financial operators, are now offered by a series of smaller and more agile companies. With some regulatory changes, startups could now offer services previously exclusive to financial institutions.

This means that Banks will have significant competition, which can lead to loss of revenue for some of their services. This movement is generating a transformation in the industry, as we can see with a number of traditional institutions investing or creating their own Fintechs.

A survey conducted by Capgemini in 32 countries indicates that 63% of respondents already use Fintechs services. In Brazil, this number reaches 74%. In addition, the Brazilian association of Fintechs (ABFIntechs) informs that there are 354 companies of this kind in Brazil. Even if there is still a question of confidence, this represents a risk for banks.

Anyway, how does this lead to the future of banks?

According to some market experts, the future of banks is to become a service platform. Or, “Bank as a Platform”.

I am not talking about a digital platform here, like Itaú and Digitaú. I speak of a platform as a business model, closer to Uber, Airbnb and Amazon than Bradesco.

In this new model, banks are more focused on serving the customer and processing transactions, becoming platforms where the customer can use financial services from multiple companies, especially Fintechs. The company does not have to be vertical and have all the technology and infrastructure to serve the customer, it becomes a structure where a convergence of different services happens, starting to process the transactions and focus on generating value through advice and customization.

For example, the German bank N26 uses Transferwise for its international transactions, rather than having an internal structure to handle it. In Brazil, Banco do Brasil announces the integration of its system with the Blue Account through an API.

This new structure is based on APIs (Open Banking concept) and collaboration between different businesses, which may be inside or outside the bank. What differentiates this type of offer is that each operation can have a different and platform-independent business model.

Obviously, to reach this structure there is a long way. First, this means changing the business model of banks, which is slow and risky — although it seems more dangerous not to change. And here we come to the second point: to change the business model, it is necessary to change the operational structure, which is extremely complicated and risky.

These transformations generate doubts that still do not have answers. First, it is not possible for all banks to become platforms due to the network effect: the customer will use the platform with the largest and best offer of services and this offer tends to be exclusive. This raises a question that is, who / what will this platform be and how can it offer services from other banks?

Second: Regulation. “Bank as a platform” means cooperation between financial entities, and between banks. This can be understood as collaboration, which in turn can be understood as a cartel. As regulators and banks can work together to create an environment, which allows the development of the financial system and does not harm consumers’ rights?

The financial sector, like so many others, is undergoing significant transformations. I believe that in the next 5 or 7 years we will see the development of significant structures and innovations, which should greatly impact the financial industry. I would like to hear what readers think about this future. Comment on the article and let me know if you want me to continue writing these texts.