Digital transformations have generally followed three distinct stages. First comes the use of IT to improve the productivity and quality of back- and front-end processes. Distribution is next, leveraging the universal reach and connectivity of the Internet for online transactions and access to information. Finally, the transformation reaches a tipping point when technologies radically change the business model and user experience, leading to a fundamental disruption of the industry.
While such a digital journey is ultimately inevitable, the pace varies widely across industries. The IT industry has been the most disrupted, - often by its own digital creations in a kind of sorcerer’s apprentice scenario. Over my long career, I’ve seen many once powerful IT companies done in by technology and market changes, and either disappear altogether or become shadows of their former selves.
Beyond IT, few industries have felt the impact of digital forces like media. In less than two decades, the global recorded music industry has lost over half its revenues, while the drop in newspaper advertising revenue in the US has been even steeper. Retail has also undergone major changes with the rise of e-commerce, as has telecommunications with the transition to mobile phones. How about banking, which has long been a leading user of information technologies?
The May 4 issue of The Economist addressed this question in a special report on Banking and Technology, with several articles on the subject. “Over the past two decades people across the world have seen digital services transform the economy and their lives,” said its lead article. “Taxis, films, novels, noodles, doctors and dog-walkers can all be summoned with a tap of a screen. Giant firms in retailing, carmaking and the media have been humbled by new competitors. Yet one industry has withstood the tumult: banking.”
But, adds The Economist, “technology is at last shaking up banking.” Two major forces are driving this shake-up: the dramatic growth of digital payments in China and other Asian countries; and the rise of mobile banking in the West, especially among young digital natives.
In China, AliPay and WeChat Pay have transformed commerce, social media and everyday life. Alipay was started in 2004 by Alibaba, with the goal of making online payments easier for its new e-commerce website. Since its inception, Alipay has grown remarkably fast while adding new services like person-to-person payments and the ability to pay for a wide variety of purchases both online and in physical establishments. Renamed Ant Financial in 2014, it’s now one of the world’s biggest financial firms. WeChat Pay, Ant Financial’s main rival, was started in 2013 by WeChat, China’s dominant social-media app.
Together, they’ve made it possible for China to bypass credit and debit cards and leapfrog straight to mobile payments. “All manner of things can be done from within their apps, including buying tickets for flights, train journeys and films, calling a taxi, paying an electricity bill, ordering food and much more.” Their remarkable growth “is both a cause and a consequence of big changes in Chinese life: development, urbanisation and the emergence of a vast middle class ready to spend.” But, it also exemplifies the radical shift that’s been taking place in the provision of financial services since the advent of the iPhone and App Store in 2007, a shift that goes well beyond China’s borders.
In the West, banking has been late to the smartphone age, partly because entrepreneurs have been put off by increasing regulations, and partly because banks have been preoccupied with repairing their balance-sheets and cutting costs since the financial crisis, - which incidentally, pretty much coincided with the advent of the smartphone. But, mobile banking is now reaching critical mass. 49% of Americans bank on their phones. In addition, US tech giants might well decide to follow China’s example and integrate digital payments into their apps, as Facebook recently ==, while relegating incumbent banks to providing back-end financial services.
Though people of every age use mobile phones, the best way to understand the future of banking is through the eyes of smartphone’s most devoted users, - digital natives. “The main reason people choose a bank is convenience,… For older people that means a nearby branch; for younger ones it means an excellent app.” 85% of American millennials, - those born between 1981 and 1996,- use mobile banking, with the share expected to be higher for Generation Z, - those born after 1996.
Digital natives are demanding customers, with expectations for speedy, convenient service. They use their mobile phones “to read, chat and play, stream music and videos, hail taxis, order food, and search for dates and jobs.” They’ve cooled on cash. “Half of American millennials use peer-to-peer payment services such as Venmo or Zelle at least once a week… just one in three American millennials has a credit or debit card, a much lower share than for previous generations at the same age.”
Switching banks has long been rare. In a given year, only 8% do so in America and 4% in Britain. But, younger people no longer stay with the same bank as their parents. An increasing number are using mobile-only neobanks. Not bearing the cost of branches or the maintenance of legacy systems, neobanks can concentrate their energies on providing the kind of digital customer experience that their demanding users expect. Innovative financial services from FinTech startups are also adding to the pressure felt by banks. “The biggest four American banks are spending a total of over $25bn a year on perfecting better customer applications and learning to mine data more cleverly. Venture-capital firms invested $37bn in upstart financial firms last year.”
The shake-up of banking should be great for customers. “The benefits of technological change are likely to be vast. Costs should tumble as branches are shut, creaking mainframe systems retired and bureaucracy culled… Rotten service will improve - it is easier to get money to a friend using a chat app than it is to ask your bank to transfer cash. The system will get better at its vital job of allocating capital. Richer data will allow banks to take risks that currently baffle underwriters. Fraud should be easier to spot… A smartphone revolution in finance offers one of the best ways to boost the economy and spread the benefits.”
But, change also poses risks. “The implications are profound because banks are not ordinary firms. It is one thing for Blockbuster Video to be wiped out by a technological shift, but quite another if the victim is Bank of America… Because the financial system is embedded in the economy, innovation tends to create turbulence.”
Will incumbent banks embrace the necessary transformations before neobanks and FinTech startup gain scale and distribution? Will we see further concentration as banks become as adept at leveraging data as technology giants, or will technology giants move into banking, as has happened in China and might happen with Facebook ? The digital revolution seems to be finally reaching banking, but there are so many factors at play that it’s unclear how it will all turn out.
It’s ironic that you bring this up now because my wife is unwinding her father and mother’s estate. They chose small local banks with no branches in the major city we live in. These banks still do almost all of their account work by paper, and it has required we take time from our busy jobs as they also do not have Saturday lobby hours. Their technology is abysmal. We are actually closing these accounts to move the money to probably the most technologically advanced bank in the world JP Morgan Chase. Chase even has their own electronic payments, Zelle. The only place I would argue that Chase is behind is cryptocurrency, and I would argue that until a government backs a cryptocurrency, it’s the realm of speculators.
Posted by: Glen in Texas | June 24, 2019 at 08:05 AM