By Dr Gavin Scruby, CIO, SmartDebit
The last few years have produced seismic changes to the potential services available to retail banking. We’ve had numerous challenger banks starting up and then taking customers from traditional banks. We’ve seen the emergence of Open Banking and PSD2 along with extended open services also jumping on the Open Banking bandwagon. We’ve also seen existing payments behemoths such as Visa and Mastercard releasing their own comparable payment systems. On top of this, nobody yet really knows the effect of Brexit on cross-border payments from the UK.
It’s like someone has thrown a pack of cards in the air and we’re all waiting to see how they land. Challenger banks are still finding their business models and Open Banking services have hardly become mainstream yet. It may not be as hard to predict the future though as it might be in other markets. Banking has a level of regulation that forces change down certain routes and the cyclic nature of industry in general can also provide clues. There are clear trends that we can think about in two main streams: ‘institutions’, i.e. where and how we will be doing our banking, and ‘services’, i.e. what banking we will be able to do.
Banking institutions of all kinds are a hostage to regulation. In such a regulated environment, real innovation happens only after regulatory change, a fact that many anti-regulation advocates ignore. After the market crash in 2008, rules were eased to allow more competition and challenger banks started appearing. Right now they are growing at a spectacular rate, largely through appeals to younger demographics using modern interfaces and eye-catching branding. But, can we say they have innovated much in their services? Due to heavy regulation, the fundamentals aren’t any different. We see some modest innovation in their digital focus and social connection options but beyond this, challengers provide the same services as traditional banks, albeit without physical branches. Outside of this, banking still has many commonalities with other markets. As in other industries that see a burst of start-up competition, the future is likely to be one of consolidation and imitation. Larger institutions will acquire smaller ones and imitate their cost-effective digital-first approach. That means we can be certain that future banking interaction channels will be more like challenger banks and less like current large banks, with fewer branches and better apps and integrations with other services. What is not clear is whether these consolidated institutions will keep their multiple brand identities and characters like record labels owned by the big recording companies, or whether they will become homogenised into a few large players like in the supermarket landscape.
The more interesting aspect is the services such future institutions will provide. The focus here will be driven by the wide opportunities created by the Open Banking regulations already in place. These force UK banks to open up their transaction interfaces so that third parties can make payments on behalf of customers. The aim of this change was to remove the stranglehold held by ‘traditional’ (and challenger) banks on financial transactions – to force innovation and to drive common standards that organisations can use to create new and transformational services.
The Competition and Markets Authority’s stated goal with the Open Banking initiative was to make traditional institutions compete harder for customers and reduce the barrier to entry for new players. The new players that are appearing don’t even look like banks; they’re often regulated companies that look more like service organisations or IT companies. Again, these will also go through consolidation, but won’t necessarily be bought by banks and in future, the services they provide will truly revolutionise what we understand by banking. We may well see large data companies such as Amazon and Apple entering this area too, extending the nascent payment services they already provide.
But organisations will just use these transaction interfaces as initial building blocks. The first thing new thing providers will do is become a central, better designed proxy for a bank’s services. They’ll become aggregators for all our accounts across different banks and will allow us to set up payments from any account, all in one place, with one well-designed portal. This is a powerful first step in providing a complete centralised view of our finances.
Once users have full direct control, third party aggregators will then start to get clever with the services they provide. With just basic read and create transactions, they can start to build more complex rules – creating a kind of payments engine. There will be payment options like ‘only pay the mortgage after the monthly salary comes in’. The next stage is natural language interfaces. With systems like Amazon Alexa and Google Home, you’ll be able to say ‘If all my transactions out are less than £500 this month, make a payment to Johnny at university of 10% of what’s left’. The system just builds on the basic payment transaction interfaces, with natural language processing rules on top. This will bring sophisticated payment processing to those who don’t get on with traditional interfaces.
These changes will take a number of years to develop, but they will happen. Over the last decade, we have seen regulatory changes that have enabled the rise of both challenger banks and third-party payment services. With the reduction of bricks and mortar banks we will see the rise of app-based and later natural language interactions to run our finances. These may or may not be controlled by traditional or challenger banks: banks may be relegated to simple account management activities. We’ll see many more non-traditional organisations providing full banking services using novel communications channels. The opportunities from these shifts are becoming clearer but are far from decided. If market or political factors force a further change in the regulatory landscape, we will be back to gazing into the crystal ball. Whatever happens, we can be sure that we will see more change in retail banking over the next twenty years than we have seen in the last fifty.