According to Sopra Banking Software's Dr David Andrieux, in a world where online marketplaces can instantly match supply and demand the most successful banks will be the ones able to deploy the sharpest real-time analytics – as that will be the only way they can keep on top of all their customer profiling, compliance and credit risk issues
If you're not on the online marketplace path, you will need to be soon. Let me explain why.
Online marketplaces are digital business to business sites that conduct regular, organised public sales to match supply and demand –which means that instead of customers visiting multiple providers, the providers themselves come to the customers with offers. It's a model that's been tested in procurement scenarios in a number of sectors for a surprisingly long time – and which is now starting to edge its way into the financial services market.
Say I am 25 years old and looking for a loan for x amount over y amount of time. I have this kind of job and this level of revenue; this customer will soon be able to go to the electronic market square and ask, what can you offer me?
The result will be banks – as wellas non-traditional suppliers of financial services – all bidding to offer that customer a loan, and the customer just has to review what offer is best for them.
The customer is much more in control of this process than in the traditional way customers secured a loan book. It also makes business and commerce more efficient. Before too long, we can expect this faster, more efficient kind of process to proliferate in the banking sector. After all, in an age of digital convenience, the average customer doesn't really care if their money gets provided to them by Bank Aor Bank B. All they are interested in is the quickest, most friction-less way of getting the credit line they want at the lowest interest rate possible in the shortest time and with the least fuss. Clearly, a good loan (or insurance and possibly a mortgage) marketplace will give the customer just such a capability, in ways they want and are used to – and via apps on their smartphones, in all likelihood.
Dangerous new entrants
We can expect the first wave of such online financial services marketplaces to start off as niche affairs for items like lending, remittances, foreign exchanges or wealth management. They may well be immature and the first few may even fail. If that is a prompt for your complacency, it's an ill-advised one – as once the idea gets traction, full 'e-marketplace banks' will appear – have no illusions on that score. It took a couple of iterations to get the tablet right – but when it did, Apple created a new market with its iPad.
This evolution will happen in phases, for certain. We expect retail banking marketplace banks will at first only generate the absolute basics (e.g. limited current accounts, debit and credit cards, perhaps digital wallets), with all other products and services (loans, insurance, etc.) likely to be provided by third parties –including traditional banks, financial institutions and the emerging class of dedicated financial technology/fintechcontenders. In the second phase, once a marketplace has won traction in a particular segment, the participants will swiftly start to offer a broader range of products and services.
Traditional banks will definitely be best placed to complete. But, right from the outset; non-traditional competitors, peer-to-peer organisations for instance, such as Lending Club or Funding Circle – can and will be very dangerous competitors, making the battle for new business even more competitive than it is now.
After all, they do have the regulatory license to operating lending, payments and so forth, plus many of them offer strong annuity capabilities. And according to Philippe Gelis, co-founder and CEO of the current leading Forex online marketplace, Kantox, the first true marketplace bank will be launched by a fintech start-up because"It is too disruptive and the risk of cannibalisation is too high to see a bank assuming the risk."
The time to act
Are these shifts happening five years down the line or now? The answer is most definitely now. Silicon Valleyis thinking and working on these concepts today. We think they will start to appear in a couple of years and will then be real factors in everyday finance no later than 2020 at the utmost.
To not just survive but thrive, it's clear that players in the emerging online finance marketplaces game will need to be nimble and well-resourced, from both a technology and a data perspective. You can't compete if you can't offer fully automated bid management and risk management capabilities, for example.
We're all also going to need next-generation credit models to rapidly spot who are the most valuable customers are –both immediately and over the longer term. The contender online banking marketplace you need to deploy inside the next four to five years will also have to be able to assess your own exposure in terms of liquidity and so on, so as to allow you to decide, in real time, whether or not you are going to compete for this specific customer, plus what price to offer. This has to be in a zero-latency context, otherwise you are going to lose the sale to someone with faster technology.
In addition, core banking products must become a lot simpler, much more modular, and transparent. That's because today's e-enabled customer is looking for products they understand, that they can buy without worrying about the small print, and which they can change easily (and without penalty) as their personal situation evolves.
New value-added services such as wallet solutions or peer advisory can then uplift those products, yes, but in a fully networked, marketplace world, it's the brands that can instantly match fickle customer demand which will be the last ones standing.
They'll also be the ones with the best real-time analytics.As for much digital evolution these days, you need to start addressing this this quarter, if you aren't already. That's because an evolution like this requires acquiring and mastering new tools, skills and competencies, developing robust technical foundations, and devising new strategies for business growth.
Minimally, we would say, a convincing Marketing and CRM platform, based on advanced analytics and up-to-scratch Big Data technologies, leveraging existing and newly available customer data for real time risk management and assessment, is a given.
Better start now rather than two years down the line, then planning to wait another two years before you have the requisite infrastructure in place – as then you will have lost crucial competitive advantage.
In 2021, it may well be that online banking exchange players will capture a significant share of the market. So what are you doing to get ready for this perhaps definitive digital challenge?