At the onset of a new decade, as the race gradually picks up and intensifies to address the yet massive base of unbanked population, and the emergence of the Gen Y and Z who will form a majority of the working and earning population, Banks are going to be increasingly challenged to address the profile of this new market.
As is clearly highlighted in the McKinsey Global Banking Annual Review 2019 (refer footnote), in a challenged environment, further compounding the situation for the Banks is the rising competition from the new entrants into the financial services space.
(a) Emergence of the FinTech companies and the so called Digital only (Neo / Invisible) Banks, and
(b) Technology Companies like Google and Amazon, the “BigTech”.
As the landscape evolves over the next few years whether in a Competitive and / or Collaborative environment, who will be the new Leaders is a point of discussion (and not a debate). Rightly so, there is a lot of mindshare being devoted to the emergence of this new Ecosystem.
Some viewpoints of my own:
1) Banks which are mired by regulatory and revenue pressures, need to view this positively; these new entrants are creating, and in the process maturing a new upcoming mass market segment with their new digital based product offerings, which otherwise for the Banks would have taken a long time to address.
2) The new entrants, especially FinTech, which are subject to relatively less regulatory control, need to focus on delivering a substantiated Business Value with quicker (and at times cheaper) Innovation, targeting a base which is potentially untouched i.e. look at creating new markets rather than compete in existing crowded spaces.
3) It is important for FinTech to create Product and Technology differentiation, rather than just being “one amongst the many”. Globally Payments has proved to be a good example, and there has been proliferation of players in that space which has led to a large base of population being comfortable with the usage of digital platforms for performing financial transactions. Building on that base, good examples of new digital product offerings which are gradually emerging and are being noticed, are Retail Deposits, Retail and SME Lending, Trade Finance, Cash Management and Supply Chain Finance, Wealth Management and Financial Information Aggregation; while making use of new technologies such as Blockchain, Artificial Intelligence, Machine Learning and Internet Of Things.
4) Banks and FinTech need to view this as a “Co-operative” scenario and should “Collaborate” as much as possible, rather than “Compete”. Both need each other, (a) FinTech utilising upon the existing Infrastructure and Regulatory Framework of the Banks to innovate and provide new financial and technology solutions, and (b) Banks which can first focus on “Retain”, and then potentially “Extend” their customer base utilising these new digital solutions / offerings from FinTech. In India, such collaborations are gradually being formed and more will likely emerge in the next few years.
5) In a “Complementary” environment, FinTech thus need to create business and technology solutions which naturally become an “Extension” of the banking environment e.g. the recent acquisition of Plaid by Visa, where the Plaid solution was an “extension” for both Banks and the Financial Apps in delivering a business value. A single FinTech can thus provide multiple such business and technology “extensions” for all participants of the financial ecosystems viz. Banks (Retail and Investment), Micro Finance Institutions, Exchanges, Brokerages, Fund Houses, Card Providers, and so on. Such an approach can propel Banks and FinTech into new markets and positions.
6) Consulting and Services organisations servicing the global Banks could act as a “Bridge” in enabling such a collaboration, even creating Joint Ventures in the process. This can lead to a more homogenous environment within the Ecosystem, enabling “Scale”, thus creating the new Leaders. In the past, this has been witnessed in Europe and in Australia, where leading Banks have partnered with Consulting and Services organisations in creating joint subsidiaries in offering banking services; Payments, Cash Management and Virtual (Only) Banking being the prime examples. This model can now be extended to incorporate one or more FinTech and their solutions. Such a Collaborative Business Model can be useful in the emerging economies like India and Far East to create a quicker and wider outreach.
7) FinTech need to overcome the pressures of marking up valuations and instead focus on delivering “business and technology value” to the end consumer. FinTech on their part need to be prudent and create a “Stable”, “Sustainable” and a “Compliant” business. In an environment of imploding PE valuations where investors have started to see through Fuzzy and Fudgy valuations, such “Strong” businesses will likely be “Admired” in the longer term. Both Banks and Consulting organisations have a role to play in “Encouraging” FinTech by helping them in creating a stable business, thus mutually benefitting everyone.
8) Finally, the Regulator needs to provide a free hand in supporting such new entrants and collaborative business models and be a “Mentor”, and not “Meddle” to enable this Goal; I suppose be a “Watchman” and not a “Watchdog”.
As we enter a new decade, the next 2 years will be the defining in terms of how the rest of the decade will evolve in emergence of this new Ecosystem. Hopefully this should benefit the end consumer i.e., the unbanked and the upcoming generation, if that is the ultimate goal!
I welcome and appreciate your viewpoints on this subject.
Thank you.
Footnotes:
1) Mckinsey Global Banking Annual Review 2019 – (https://www.mckinsey.com/industries/financial-services/our-insights/global-banking-annual-review-2019-the-last-pit-stop-time-for-bold-late-cycle-moves)
2) Rise of Invisible Bank – American Banker (https://www.americanbanker.com/news/the-rise-of-the-invisible-bank)
3) FINTECH Switzerland – Booming Challenger Bank Market Report (https://fintechnews.ch/virtual-banking/new-report-sheds-light-on-booming-challenger-bank-market/32682/)
#Banks #GlobalBanks #FinTech #DigitalFinance #DigitalBanking #Consulting #ConsultingOrganisation #ServicesOrganisation #Regulation #Blockchain #AI #IOT
First published in January 2020.