BANKING FOR DIGITAL NATIVES: HOW NEW TECHNOLOGY AND CHANGING DEMOGRAPHICS WILL TRANSFORM PAYMENTS, DEPOSITS AND LENDING

By Sriniketh Chakravarthi, Head of Banking and Financial Services for Continental Europe at Cognizant

The Millennial Disruption Index survey of young bank customers in the United States is a fascinating read as it reveals how differently millennials or digital natives (people born between 1981 and 2000) view banking. The survey shows that in five years’ time, 68 percent believe we will access our money in a completely new way, 70 percent say the way we pay for things will be totally different, and 33 percent say that they won’t need a bank at all. These findings should come as no a surprise as many members of this wholly digital generation rarely enter a bank branch and use mobile first – smartphones or tablets – for all their banking needs.

Changes in technology and customer demographics are leading to a fundamental shift in the way banks are perceived and used or, as it may be the case, not used. As such, innovative payments methods and the changing banking landscape, including the use of mobile devices, are rapidly leading to an atomisation of financial services. We can already see how banks face disruption from new non-bank players including major tech companies such as Google and Apple, but also smaller disruptive payments players like Tink, Toborrow, Klarna, iZettle and SEQR.

There are three key tenets of banking that will be fundamentally challenged in years to come: transaction processing (i.e. payments), deposits and lending. Though currently only seriously challenged peripherally in regards to payments, this disruption will eventually reach the other two core aspects of banking, currently not possible due to banking regulations.

Payments
High proliferation of smartphones and tablets has led to the creationof a new payment landscape where non-bank actors process transactions between buyers and sellers in real time and, most importantly, without involving the banks.Some of the new players, such as Klarna, Apple Pay and SEQR have either enhanced, modified or partially bypassed traditional banking networks to process transactions.By being left out of such transactions, banks lose someaccess to customer insights as well as a substantial amount of their core business.

Deposits
A growing number of retailers are offering customers a variety of deposit options, some of which offer better yields than with traditional banks and with the convenience of liquidity. As a growing number of non-banks enter the deposits’ arena and offer customers compelling alternatives, banks face a growing challenge in what was once their own exclusive core business area.

Lending
Technology is creating new and direct lending options for retail banking customers. Through a combination of technology, social networks and analytics, individuals are now able to lend directly to others through peer-to-peer platforms such as Lending Tree, Fixura or Trust Buddy.

Overall, the bank’s traditional function as intermediary of risk and transactions is being challenged. While the banks’ new disruptive competitors are still seen as operating on the fringes and with the disruption mostly visible in the retail side of things, especially in payments, the trickle of today could easily become a deluge pretty soon.

To counter these disruptive trends, banks need to first of all reassess their own contribution to the new value chain being created and find where the bank can add customer value. For example, customers may choose different payment options for different transactions but all of them would value having access to an aggregated dashboard offering a useful overview of personal finances. Secondly, they need toembrace new trends and enter new business areas while using the bank’s brand, trust, technology and network as selling points. For example, a US bank recently launched Peri, which is an instant mobile shopping app and service. Thirdly, financial institutions shouldally with the non-bank players. For example, banks such as SunTrust and Barclaycard have embraced Apple Pay. While banks and major financial institutions are increasingly active in the peer-to-peer loan arena by offering loans on P2P lending platforms, the next step could be to launch or buy up lending platforms of their own. Furthermore, banks should go from online-only strategies to mobile-first strategies. This entails, among other things, ensuring a well-designed and user-friendly experience though mobile apps and mobile optimised websites. Finally, banks need to consider increasing customer protection and IT security to enable customers to do their banking and transactions on the go, since it involves handling sensitive personal information.

Giving millennials/digital natives the bank services they want is by no means a small task. The mobile bank, which be availablearound the clock and always has to be user-friendly, must also guarantee vault security at all times. To stay ahead of the curve, banks can and should look to the new competition for inspiration.

Keeping a watchful eye on atomisation trends and simultaneously developing services to meet changing customer demands ultimately requires banks to remainflexible and embrace the disruptive nature of digitalisation.