David Griffiths, Director of Client Services, Virtusa
Google the definition of “bank” and you get the following, “land alongside or sloping down to a river or a lake”. Correct, but not quite the definition most people expect when they think of a bank today. Clicking to the next page of the search results brings up financial establishments that use money deposited by customers for investment, paying it out when required, making loans at interest, and exchanging currency.
Interestingly, there is no mention of moving money around, making payments, or the provision of current accounts – even though these products and services have been provided by the banking industry since before the 18th century. For most of that time, the retail (payments) side of banks have been interwoven with the investment side. It is only recently this has begun to change;essentially since the financial crisis of 2007/08, when banking legislators moved to force a separation.
The evolution of payments – futurology for all
The investment side of banking continues in line with the Google definition – that’s the one about money rather than the one about the grassy slope.The retail payments side was, arguably, never actually a banking function in the first place; a payment is simply the act of moving some arbitrary common value from one place to another, and banks primarily store it rather than move it.However, payments did become a de-facto banking function because payments involved money and trust, and that’s what banks did.
The financial infrastructure of the 17th and 18th centuries lent themselves to embryonic payment services being operated by the banks. Today, following the introduction of open API principles and the PSD2 in Europe, are we now seeing a 21st century banking reboot?
If that is the case, the banks are faced with one of two options.
They can whine about the destruction of their business models at the hands of the legislators and then watch as it slowly erodes – or they can embrace the future and the opportunities that open API banking presents, and rise to the challenge. The application of innovation is open to all, and the art of futurology is not the reserve of the challengers.
Where does the real threat to banks coming from?
Established banks have themselves a clear advantage;they already enjoy the benefits of an established customer base, along with the reputation that goes with it. Challenger banks have none of these things, but the lack of legacy means they can move quickly to exploit opportunities. Even so, the challengers need critical mass, for which they need something a little more ground-breaking than a current account on a smartphone. Without innovative products and services to attract customers, customers have few reasons to migrate.
What would a critical mass look like? Well, without giving away the nature of any killer banking application, let’s assume that there is a ‘killer’ banking application, and that everyone with a current account wants a part of it. Here, the challengers have the advantage. They can move quickly to design, develop and deliver the services that consumers are demanding, and then they can sit back and watch the churn.
The established banks are limited by the legacy systems that support the number of customers they serve, and are powerless to match the agility of their adversaries.Luckily for the established banks, there is no killer application, yet. Also, any such application is unlikely to be found within existing core banking services. It is much more likely to be found outside, where the challengers shine. But the challengers shine alongside the fintech start-ups, and the fintech start-ups are keen to take advantage of any emerging opportunity. The so-called killer application is therefore just as likely to come from a fintech start-up.
Banks and fintechs are a better match than many think
If established banks are to emerge triumphant, they are going to need help to develop the services their customers are demanding – and they are certainly not going to receive this help from the challenger banks. Instead, they should be looking to form partnerships with fintech organisations that can help deliver new and innovative services to existing customers quickly.
This kind of collaboration combines the best of both worlds; speed of delivery, allied with an established customer base and the trust that goes with it.If the firm foothold that has been established over many years is lost, the inevitable slide down the bank, so to speak, is going to be swift, and the water at the bottom will wash away all traces of what was there before.