By Stan Cole, Head of Financial Institutions, Inpay. 

Physical banks have existed for centuries, but nowadays, there are plenty of people who would barely notice if they were gone. We’ve seen an immense digital transformation over the last few decades and it’s now the norm to conduct most (if not all) banking activities via mobile apps and other technologies. In fact, many people have ditched physical banks altogether. In the UK, for example, over a quarter of adults have an account with a digital-only bank, and this trend is only set to continue. By the end of 2021, 38% of Brits (almost 20 million people) either will have or intend to have a digital-only bank.

Although the ways in which we handle and manage our money are so different from what they once were, this is just the beginning when it comes to technology in the banking sector. This is especially true against the Covid-19 backdrop, where the mass closures of physical bank branches accelerated the need for accessible online alternatives. This digital landscape has been embraced by many, with almost 50% of respondents in a survey by DepositAccounts claiming they will never return to physical banks ever again. As a result, banks need to accelerate their technological capabilities to cater to these new, post-pandemic customer demands.

Banks face serious competition from fintechs

Technology is a pressing concern for banks given that there are so many fintechs delivering exciting solutions that are tempting even the most loyal customers away. Although banks tend to have long histories and strong brand reputations, they are also burdened by outdated legacy systems and software. Fintechs, on the other hand, don’t have this issue and can therefore put all their efforts into their products and focus on maximising innovation.

Many fintechs already have bigger consumer bases than banks and banked customers are continuing to deviate to these alternatives. A report by McKinsey predicts that by 2025, 10-40% percent of bank profits could be under threat due to the expansion of fintech companies. Therefore, banks have to work out how they can improve their offerings to match changing customer expectations — a result of the leaps made in financial technology in recent years. It’s no longer enough to create and market products based on interpretations of customer data obtained via personal contact. Now, like fintechs, banks must be entirely customer-centric, improving and extending their means of data collection and analysis to provide tailored services that help customers achieve their financial goals.

Banks must fight off the threat of Big Tech

Big Tech — the collective term for the largest and most dominant companies in the US IT industry — has been active in the financial services sector for some time now. For example, Apple Pay is now on track to account for 10% of all global card transactions by 2025. However, these world-famous brands are not simply acting as digital wallets — they are also offering enticing, user-friendly financial products and services. And when you consider that Alibaba and Tencent (two of China’s biggest tech firms) cover 94% of the Chinese mobile payments sector, banks have every reason to fear that they could eventually be overtaken by the likes of Google, Apple, Amazon and Facebook.

This is a very real threat given the power, authority and fame Big Tech holds in society at large. These firms have already gained very large and loyal customer bases, have exceptional reputations, and have the ability to access funding with relative ease. The very nature of these businesses means that they also have masses of customer data to take advantage of, and can get the very best out of it due to the fact they aren’t burdened by the strict regulations banks must abide by. What’s more, banks (typically stuck using outdated legacy systems) simply can’t compete with the cutting-edge technology employed by Big Tech platforms.

Tech innovations are vital for banks to compete post Covid-19

Facing fierce competition from fintechs and Big Tech, banks are left to decide whether to actively compete or instead seek out fruitful collaborations. Generally, forming partnerships is the preferred option. The need for technological transformation has been greatly accelerated by the pandemic, and banks now must shift towards customer-centric platform-based models as soon as possible. To do so effectively, they will need the help of tech-minded organisations to successfully restructure.

There have already been numerous high-profile collaborations between leading banks and Big Tech firms, like Apple and Amazon with Goldman Sachs, and Google with Citi. The advantages for both sides are evident. Banks will benefit from tech, reputation, customer base, and the fact that Big Tech firms can bundle their existing services, such as e-commerce and online advertising, with traditional banking products. Meanwhile, Big Techs avoid the need to obtain banking licences and be held to strict regulatory standards that could limit their innovation capabilities.

On the other hand, some banks may be reluctant to collaborate with Big Tech companies as there is a risk of reducing their profit margins, especially if they assume control over the customer interface. Others may be interested but are lacking the funding to launch a partnership with such huge brands. However, in these cases, partnering with fintechs is an excellent option.

Example: Cross-border payments

One area where banks should consider improving their offerings in the wake of Covid-19 is their cross-border payment services. The pandemic means we are likely to see further growth in global eCommerce, while the pandemic has also triggered a number of new SMEs across the world — at the end of 2020, the Financial Times reported a sharp increase in new company registrations in the US, UK, France, Germany and Japan. Additionally, the uptake in remote working could mean more employees decide to work overseas, plus there may also be an increase in remittances. Therefore, banks must be prepared for a greater volume of international transactions and have the technology to facilitate them, particularly when Big Tech firms are already turning their attention to this need. 

Google Pay recently enabled customers in the US to quickly, safely, and reliably send money abroad to users in India and Singapore, but plan to expand to over 200 countries by the end of 2021. With that in mind, why would a customer choose a bank that probably charges much more for this service? Especially when it can often take days to complete via traditional wire transfer.

For this reason, banks can only hope to gain market share by partnering with a fintech company employing cutting-edge technology to streamline the international money transfer process. This would allow banks to offer cross-border payment services with the simplicity of domestic bank transactions and at a lower rate.

To stay competitive in a post-Covid world, banks must find well-matched, tech-led partners to help them utilise the data they really need, and create the customer-centric offerings so many of their clients have now come to expect.