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The Future of Banks: Financial Democratisation
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When last did you hire a video? What was once an integral part of the entertainment landscape is now nothing but a fond memory of the 90’s. An entire industry died alongside hair crimping, the Backstreet Boys and the Nokia 1610. But just as videos evolved to DVDs and now to their online format, so too the banking industry faces an imminent evolution. There are numerous opinions on the future of banking – some more radical than others – but what is certain is that the democratisation of finance has begun.
Banks have long enjoyed operating in a monopolistic climate, offering bundle services to clients at high rates, with limited transparency and for the most part, without showing much progress in innovation. The 2008 global financial crisis introduced the first significant wave of disruption, causing a drop in trust of financial institutions and creating a window for third parties to begin entering the market. With the spread of the internet and technological development, the Fintech (‘financial technology’) industry has grown rapidly, increasing market transparency and challenging the traditional banking model.
Despite market developments, what consumers want has essentially not changed much over time. Lower costs, convenience, security and personalised, high-quality service has been a long-standing consumer priority. While banks operated within a monopolistic environment, many of these needs were not adequately met, however, faced with few other options, consumers have been forced to subscribe to limited financial offerings. Long gone are the days of having a personal relationship with your bank manager; banks have become impersonalised service providers where services offerings are relatively inflexible to the needs of their clients.
According to Lionel Barber, editor of the Financial Times, “nobody wants to be in banking, everyone wants to be in fintech”. While this is a bold statement to make, third party disruptors – many of whom do not come from a background in finance – have begun to permeate mainstream financial markets and turn traditional banking on its head. Technological development and the Internet of Things has facilitated rapid development in the financial sector, giving control back to consumers and sidestepping the proverbial middleman.
A vastly different banking landscape is inevitable for the future, but how quickly this will be adopted and by whom is of particular interest. According to a study conducted by YouGov, the below image illustrates predicted use of a technology provider for financial services in the UK. Within the next 10 years, technology providers will be widely used for frequent, lower value transactions. High value transactions such as loans, mortgages and investment management are, however, are still likely to be conducted by traditional financial institutions. The number of people willing to trust technology providers with all their services is unsurprisingly low, however, this may well change depending on tech evolution in the next 10 years.
The above study is applicable across many Western countries where trust in financial institutions is deeply ingrained and consumers are cautious of new technology. Based on the question of trust, the financial industry is considered to be relatively difficult to disrupt, however, developing countries such as China – which consist largely of first-generation savers and investors – have no prior conditioning that would make them wary of conducting all their financial transactions with technology providers. It comes as no surprise then that China is considered to be at the forefront of fintech given its investor behaviour, relatively liberal regulations, economic advancement, and mobile tech proliferation.
Two major inhibitors of fintech development are country-specific regulations and security concerns. Regulations that are too lax raise investor risk, while those that are too stringent stifle innovation. Security is a serious concern and consumers face the risk of being heavily exploited if security is not a fintech priority. Systems such as Blockchain have been introduced as a means of guaranteeing secure transactions, however, development and widespread implementation of these systems will require some time.
So what will the bank of the future look like? To begin with, it’ll be largely within the hands of the consumers themselves. Literally. In a smartphone in the hands of consumers. It is likely that you spend more time with your smartphone than with anyone human or organisation. It has the potential to access all of your data, your locations, spending habits, sleeping patterns, meal preferences etc. and could be used to provide you with a highly customised service offering based on this data. This is an extremely powerful tool for consumers and financial institutions alike; allowing better access to consumers than ever before and providing consumers with highly specialised financial services at the tap of a screen.
In response to the changing financial landscape, traditional banks face the choice to adapt or die. The financial industry is facing a major revolution where power is shifting out of the hands of banks and into the hands of consumers. In addition to adapting to the disruption caused by fintech providers, banks need to focus on adapting to an entirely new business model. While most consumers acknowledge their need for a bank when dealing with large sums of money, they are engaging more frequently with fintech for their daily transactions. Maximising smartphone capabilities and the adoption of multichannel approaches is thus essential for banks if they wish to remain relevant. The democratisation of the industry will result in a host of innovative new service providers, and a welcomed reshuffling of financial sectors; some remaining in the control of banks, but many being controlled by non-banks.
From a brick and mortar perspective, banks are predicted to face a dramatic decline. According to a study conducted by Bain, the number of bank buildings in Holland has decreased by 75% over the last five years, given that much of the population conduct their banking online. The ATM is also predicted to become redundant in time as transactions become largely cash-free or based on virtual currencies such as Bitcoin. The remaining premises will likely become a destination for more complex financial advice regarding loans, mortgages and significant investments which, provided that banks are operating effectively in the tech space, will allow for a significant reduction in their capital expenses.
While this has been an extremely broad overview of the future of banking, the future is looking bright for consumers. Lower rates, increased transparency, dramatically increased convenience and specialised services address many of the frustrations consumers have had with traditional banks. Lower barriers to entry and an increase in services such as peer-to-peer lending also allows more people access to financial services than previously had access to them. Increased competition is driving an increase in innovation and transparency which in turn is providing consumers with greater freedom and more choice; true democratisation of finance is happening.
