The Digital Banking Revolution: Who Will Survive?

The digital revolution has morphed from an 'existential threat' to a mandatory 'survival strategy' for the world’s retail financial institutions.

The scale of disruption in the banking industry is unprecedented — across every market, every distribution channel and every single product line. The proliferation of real-time, low-cost fintech competitors poses a potentially fatal risk that will severely test the limits of traditional players’ IT systems and their ability to respond to rapid changes in consumer expectations.

Not long ago, the industry debated whether or not new fintech startups could generate any real traction. Now discussions center on just how quickly and how far transactional banking will be unbundled and margins slashed.

What is the best course of action for traditional institutions? While there are a number of strategic options and potential responses, the correct path is not yet clear. Some banks — big ones flush with resources — are building their own technological solutions, while others are buying fintech upstarts outright. Banking providers can partner with fintech players and/or open up their platforms and grant third parties access to their customers — two other strategies that have gained ground.

The question is… who will survive?

Two issues at the heart of the issue: trust and customer experience. Traditional players have the edge on trust, but fintechs have the upper hand when it comes to CX.

Regulatory hurdles facing fintechs and consumer apathy may postpone the demise of digital laggards in the banking industry. In the interim, it may seem tempting for traditional institutions to let fintechs burn cash experimenting with what works… then scavenge their corpses for whatever ideas bear fruit. But that is a risky gamble. Banking providers must cover their bets, and ensure that they have the resources and architecture to embrace emerging channels, products and services — and do so quickly. Failure to do so will leave them even more vulnerable than they are today. If they cross their fingers while dragging their feet, they could find themselves reduced to mere “dumb pipes”, providing the infrastructure for others, with few touchpoints left to drive growth and cross-sales.

So who will prevail in the Digital Age? Will it be the fintech challengers — those on the cutting edge of UX? Or the entrenched banking providers who have consumers’ trust?

To gauge the pace and extent of this revolution, the Economist Intelligence Unit surveyed senior retail banking executives around the world about consumer expectations and where they intersect with emerging technological trends.

Read More: Three Paths to Digital Transformation in Banking

A Radically Different Future for Banking

The problem with innovation is that it is unpredictable in terms of timing, scale and consequences. Yet respondents in the Economist’s research made bold predictions about how the banking business models will look in five years’ time.

The future of banking. By 2020 banking execs expect the landscape to be shaped strongly by both technology and non-traditional competitors. They believe that retail peer-to-peer (P2P) lending will be available via traditional providers’ platforms, retail banking will be fully automated, and more money will flow through fintech firms than traditional retail institutions.

Digitization is driving transformation, rewriting the model as consumer expectations change. The importance of branches and human interaction are all open to debate. Many traditional banking providers are hoping that they can remain at the center of consumers’ financial lives by shifting branches from cash-handling transaction centers to value-added financial advisory.

Competitive Pressures Amplify as the Landscape Becomes More Complex

“You cannot be a one- or two-product niche player.”
— Pralay Mondal, Senior Group President for Retail & Business Banking at YES BANK

Individually, the “scare scores” in the Economist’s research related to changing customer behavior, new entrants and new technology are easing downward. Collectively, however, they still represent a significant challenge to traditional banks and credit unions.

The industry still faces competitive threats from many different directions. Apple Pay and its ilk and other non-financials may yet emerge to really upset the traditional banking sector’s status quo. Robo-advisers could lure away more profitable consumers, while P2P lenders attract dissatisfied borrowers and savers/investors.

“In the digital arena, our position is a smart follower. We do not intend to reinvent the wheel.”
— Severin Mayer-Heinisch, Raiffeissen Bank

Competition will come from non-financial services firms, payment players and P2P lenders, suggesting a “pic’n’mix” for consumers rather than lots of new one-stop shops. Indeed, even many challenger banks will be opting for lighter regulatory options, avoiding the hassles and high maintenance issues associated with full-service models.

Newcomers still have a small share in most of their markets. Fintechs continue to face significant barriers as a result of regulatory realities. That may explain why we have not seen an Apple Bank, Google Bank or Facebook Bank and perhaps never will, according to interviews the Economist conducted as part of its research.

The Fundamentals of Evolution: Adapt or Die

Financial execs say they see three key areas where they must change: adapting the role of the branch network, securing the right talent, and modernizing their technology. Banks and credit unions still have the relationships — and the data that comes with them — but can they maintain and build on that advantage? In order to remain relevant, banks have to change from within and they have to respond to change forced upon them by newcomers and regulation.

Technology is a competitive threat, but it also must be part of the solution. In fact, “In Tech We Trust” may just be the banking industry’s new motto. Banks are spending significantly on digital solutions, but the reasons why are increasingly diverse. With growth and cost bases under pressure, client acquisition and pricing are the main drivers, but not by much.

“At the end of the day, we are a data analytics business.”
— Giles Andrews, Founder of Zopa

Fast-growing fintechs know that data is the fuel of the future. Banks and credit unions also know that they have to accelerate their acumen with how they handle and analyze data. Even institutions with poorly integrated systems already collect vast pools of data, but few have the tools to interpret them well. Why do consumers still have to submit proof of income for loans when their bank sees their salary come in every month?

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