Bill Gates said that people usually overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.
Since I have been in banking for 25 years and intimately involved in the digital transformation of banking for the past five years, I have formed some strong ideas on the future directions of the industry.
To give a perspective on the degree and speed of change, when I left Citibank in Poland banks in Europe had only begun rolling out remote access to their services. The first step to encourage people to start using banking services without the necessity of coming to the branch was transforming our contact center into the “biggest branch”. It meant that all services, including cash delivery by courier to your home address, could be arranged by phone.
That was just seven years ago, and much has changed in Europe since. But moving to Asia to work first for Standard Chartered Bank and then DBS Bank made me realize how much the banking world has progressed. For example the interbank transfers infrastructure in India is, in my opinion, the most advanced in the world, while China dominates in modern payment systems between individuals. The contrast to the situation in the United States, where I came to work at Chase in 2018, is striking. But overall, the experience in each region points to the industry’s future direction.
Mobile-Only Success, Helped By Biometrics
Infrastructure in India, backed up by biometric technology related to the Aadhaar ID (created by collecting biometric data from over 1.2 billion people), enabled the DBS team in Singapore to create a bank that had no branches, no traditional contact center and no operations. Yet this mobile-only bank, Digibank, has acquired an impressive number of customers and was named by Euromoney the best digital bank in the world.
Biometric authentication of customers was a key element of this success. It saved lots of money that would have been spent to open branches and employ a large number of service staff. Last but not least, it made the whole experience extremely easy for consumers.
In addition, India allows account funding, money transfers to accounts in other banks as well as bill payments, all online and real time. Those transfers can be made both to account numbers, mobile phone numbers or specially created aliases (via a system called UPI). An interesting characteristic of India is that this infrastructure has been created by the central bank and government-related institutions that make it mandatory for all banks. This has created an amazing level playing field for all participants.
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Payments All Happening Outside of Banking
India stands in contrast to China, which is dominated by two e-commerce platforms: Alibaba, with Alipay, used by over 500 million active users per month; and Tencent with its WeChat platform (which includes WeChat Pay) used by over one billion active users per month. These two companies handle the vast majority of peer-to-peer and overall retail payments in China.
People in China say they wake up and go to sleep with WeChat. No wonder, as it wakes you up in the morning, allows you to book a taxi, a car, a train or airline ticket, order food, chat with friends, make a call, send a gift card, and order a haircut, spa or cinema tickets, all on a low-cost smartphone. People of course need to pay for all these services and all of those payments are entirely done outside of the banking system.
In addition, the customer experience is amazingly simple. Many functions are handled by a bot that reacts to both text and voice. China also uses the latest biometric technology including retina and face recognition in order to authenticate and verify the users. An example is “Payment with a smile” implemented by AliPay allowing payments authorized by face recognition.
No More Monolithic Banking
What does all this have to do with the future of banking? I believe these examples provide clear indications that the industry will not be nearly as homogenous as it has long been, particularly in the U.S., and I believe the change has already started.
When I moved to the U.S. in mid 2018, I was surprised to see that the country of Apple, Google, Facebook, Amazon and Tesla is clearly lagging behind their Asian and European counterparts in terms of banking innovation.
The banking sector here is dominated by a few big players, and is also divided into a large number of regional and community banks and credit unions with varying levels of service. Online payments are not as popular as in Asia, contactless payments are still in the very initial stage compared to the other continents, where they have become a standard.
There are still millions of checks in circulation — I was surprised to learn that the only way to pay my landlord was to issue a check. Even when I initiated a payment using a mobile banking app, I learned that it was subsequently printed as a check and delivered to the beneficiary by mail!
And yet at the same time, big banks are able to eliminate fintech competitors with one smart move. Chase, for example, shook up the robo advisory market by introducing a smart investment platform called YouInvest, offering users 100 free trades per year.
Much has been written about the possibility of one of the big U.S. tech or e-commerce companies, particularly Amazon or Google, going head-to-head with banks and credit unions. Many observers believe that these companies do not want to directly compete with banks, since banks are major customers of their cloud services. I believe, however, that Big Tech is a direct competitive threat to banking.
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Two Visions of Banking’s Near-Term Future
It looks to me like banks are not anywhere close to extinction, especially in the U.S. Ironically, one may doubt if that also holds for China, where nonbanking platforms are so dominant.
Despite that, there is one thing I am convinced of — banks and credit unions everywhere will be different than today, and the differences now seen in different parts of the world will continue. The landscape will largely be determined by the regulatory regimes in the different regions and countries as well as by cybersecurity issues. In Europe, for example, which was still largely homogeneous when I left in 2012, we now see the biggest variety of different solutions.
I see two possible scenarios – both of which assume that banks will always remain organizations of public trust:
- Banks and credit unions stay in the background of the customer-facing solutions delivered by startup fintech companies, maintaining the core functions of deposit protection and risk-taking on loans.
- Traditional financial institutions deeply transform themselves and buy or integrate with fintech solutions and continue their domination in the market.
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It’s Good-bye to Branches and Cash
I have no doubt that traditional banking branches will disappear and will be converted to advisory offices with relationship managers assisting consumers on more complicated transactions. These facilities might become embedded into coworking spaces, or create them themselves, thus becoming an integral part of the new sharing workspace infrastructure.
Consumers will mostly be using internet and mobile platforms to obtain services by chatbots and robo advisors.
Cash will disappear or will be drastically reduced. I remember a conversation with a Chinese man I met in Malaysia who told me that for the last seven years he had not used cash while in China. A similar situation exists in Africa, where M-Pesa has dominated the payments market for several years using simple SMS texts on mobile phones.
Traditional contact centers will also disappear and be replaced by bots that will offer service everywhere and all the time either by phone or voice-powered devices like Alexa. All banking services will be executed online and in real-time using a few voice or text instructions while real-time data analytics will lead to a true personalization of the banking offer for each client.
Thanks to technology, access to banking services and especially investments will be fully democratized. Very soon each of us will be able to deal with a robo advisor that will be competent, polite, acting in our best interest and — always available!
Sonia Wedrychowicz previously was digital transformation leader at JPMorgan Chase and DBS Bank. At DBS she was instrumental in launching the bank’s digital bank. She was also head of Citibank’s Consumer Bank in Poland.