Most Australians are now banking exclusively through digital channels, according to Boston Consulting Group’s annual retail banking report, which sounds a warning for banking incumbents.

BCG says technology and rising consumer expectations are eroding incumbent banks’ long established advantages and younger consumers see less value in their traditional offering of an integrated value chain and “trust”.

Without action, the analysts warn, large retail banks like Australia’s Big Four, are at risk of ceding market share to neobanks, fintechs, and digital giants like Apple and Facebook – which pushed significantly further into financial services this year. 

Australia’s upcoming open banking regime, which mandates banks release consumer data to consumers and third parties, also threatens to accelerate the change, according to the report, by providing new business models for the challengers.

Already Australian digital only banking customers (53 per cent) outnumber hybrid (36 per cent) and face to face customers (10 per cent) combined, according to BCG’s Global Retail Banking 2019: The Race for Relevance and Scale.

Source: Boston Consulting Group, Global Retail Banking 2019: The Race for Relevance and Scale.

But the increasing appeal of digital banking products and services is evident around the globe.

85 per cent of 18- to 24-year-olds would trust third parties to aggregate their financial data, according to the research.

The report found one third of personal loans are originated by fintech lenders in the US. In China among people under 25, three times as many use WeChat than the total credit card customers of the top five banks combined. 

One analysis by the consultancy found UK digital-only neobank Monzo was able to reach one million customers three and a half times faster than a branch-based challenger bank. 

The report also found the share of digital and hybrid retail banking customers has risen steadily over the last five years from 65 per cent to 88 per cent.

A “Stacked” future

The digital challengers all excel in an area which BCG says is where the retail banking experience is heading: digital engagement through a platform based or “stacked” industry structure. 

Source: Boston Consulting Group, Global Retail Banking 2019: The Race for Relevance and Scale.

Unlike vertical integration, which incumbent banks have mastered with integrated value chains, a “stacked” industry structure has business models built around certain parts of the banking stack. Organisations can focus on a particular part of a stack, like user interface at the top of the stack, and connect via platforms for other services, meaning ownership of products and infrastructure is no longer required.

“This transition is occurring at an ever-increasing speed, which means that retail banks must rethink their positioning and business models,” the report says.

The ultimate impact will vary by market, according to BCG. In some incumbents will continue to lead into the future, in others challengers will cause a consolidation of incumbents, while in some markets today’s big banks will morph into “utilities” as ecosystems and platforms take over customer interfaces.

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