Banks are changing dramatically amid an avalanche of regulatory change and widespread debt reduction. They will be safer and, sadly for users, costlier as a result. Yet, all of this may soon seem somewhat irrelevant, because technology could transform the way banking works far more profoundly.
Banking is very “digitisable”. Cash is the only part of the industry that is inherently physical and that is a tiny part of what a bank does. The rest is really about transferring and modifying property rights and information of various sorts, all of which can be digitised. Of course, banks have invested huge sums in technology — automating processes and enabling customers to bank online — but we have not yet seen the fundamental transformation of business models that have taken place in other sectors, such as music.
It will happen and when it does, it will have a huge impact. Some of the consequences are clear from other industries. Intermediaries disappear or get marginalised unless they discover new ways of adding value. Look at what has happened to recorded music companies or book shops. Customers of Spotify, a music service, do not buy recordings of individual songs — they buy a subscription to a cloud-based archive. Banks are the primary intermediaries of the financial world, so their margins will fall unless they reinvent what they offer their customers and how they work.
Perhaps, surprisingly, the transparency of the internet does not always lead to the disaggregation of bundles and the disappearance of cross-subsidies. Things get pulled apart and put together in different ways. Monetisation, costs and customer value can be even more often disconnected than in the physical world. New business models will emerge, as we have already seen: Lending Club’s peer-to-peer model is changing personal lending. Some will thrive, many will fail.
Above all, customers will benefit enormously. Greater transparency will mean better prices for customers. Digital delivery will mean never having to go to a branch. More information and more flexible service configurations will put the customer in control.
Why is it happening so slowly compared to other industries? Part of the answer lies in the banks themselves. Contrary to what many believe, banks are extremely risk-averse.
But regulation is an even more powerful impediment. Technology-driven innovation that leads to big winners and big losers, that replaces established products with flexible service bundles, that overturns established business models and blurs the boundaries of banking, and that sometimes fails to deliver quite what was intended, does not fit well with today’s regulatory zeitgeist.
Yet, despite such challenges, banks and their regulators are going to have to embrace technology-driven innovation. Otherwise, it will simply happen by stealth, driven by players outside the industry. We have already seen examples such as M-Pesa, the mobile payments solution pioneered in Kenya or PayPal.
We are stepping up the pace of innovation at the bank I run: generating more ideas and implementing them more swiftly. By making everything digital, we see huge opportunities to enhance the value to our customers.
Published in The Express Tribune, July 15th, 2013.