The traditional retail banking model based on the transaction/branch-based banking model is dying, and in future retail banking will be fully automated.
That’s the view of 203 senior retail banking executives across the globe who were surveyed by The Economist’s Economic Intelligence Unit (EIU) for a report called “In Tech We Trust”. It’s the third study of its kind.
One standout finding is that bankers are far more concerned about the threat of digital disruption posed by the new generation of fintechs than they are about more traditional worries such as the tighter regulations which followed on as a consequence of the GFC in the last decade.
Fintech is described as a potentially fatal risk to the banks that will prove “a severe test of banks’ IT systems and their ability to respond to rapid changes in customer expectations, short product development times and growing cyber risks.”
According to the report, “The digital revolution has moved from existential threat to potential survival strategy for the world’s retail banks.”
The authors note, “The scale of disruption is unprecedented, across every market, every distribution channel and every single product line. Fintech poses a potentially fatal risk and will be a severe test of banks’ IT systems and their ability to respond to rapid changes in customer expectations, short product development times and growing cyber risks.”
They say that discussions now centre on just how quickly and how far transactional banking will be unbundled and margins slashed.
While the correct path is not yet clear, the report says that strategically, banks have a number of potential responses. “Some banks are building their own technological solutions, where resources allow. Others are buying the fintech upstarts outright, a quicker but increasingly expensive option to molly-coddling fintech hubs.
“Partnering or opening up bank platforms to give third parties access to customers are two other strategies that are gaining ground. A European regulatory push would allow retailers and aggregators unhindered access to account information for client-approved payments and data-mining.”
Among the key findings of the report, which was sponsored by Temenos:
- The banking world of the future By 2020 bankers expect the banking environment to be shaped strongly by technology and non-traditional competitors. They believe that retail peer-to-peer (P2P) lending will be available via banking platforms
(65%); retail banking will be fully automated (64%); and more money will flow via fintech firms than traditional retail banks (57%).
- Profits face multiple attacks Business models must adapt to survive. Individually, the “scare scores” attached to changing customer behaviour (22%), new entrants (26%) and new technology (24%) are significantly lower than in previous years; collectively, however, they still represent a significant threat.
- A multi-headed monster That competitive threat will come from many quarters. Apple Pay and its ilk (20%) and other non-financials (20%) may yet emerge to upset the traditional banking sector. As keen as regulators are to encourage competition, new banks are seen as less of a threat (16%). Robo-advisers could lure away more profitable wealthy (and the not-so-wealthy) clients (17%), and P2P lenders attract dissatisfied borrowers and savers (21%).
- Regulators still watching The too-big-to-fail rules are almost complete, but there is still plenty to keep compliance
departments busy. Regulators now have time to cast an eye over consumer protection issues, with product design and transparency (24%) and fines and recompense orders (19%) still in play.
- Banks are adapting Bankers see three main areas that they must change in order to survive: adapting the role of the
branch network (36%); getting the right talent (35%); and modernising their technology (31%). Banks still have the relationships and the data, but can they maintain and build on that advantage?
The authors note, “Modern banking has not changed much since the moneylenders of Renaissance Italy employed a trust-based system to move money from one merchant to another for a hefty fee. That transaction model is the basis for relationship banking, the high-profit lines on which bankers rely.”
Alas, digitisation and changing customer expectations are rewriting the model, according to the study. “The touchpoints of branch footfall and human interaction are in rapid retreat.”
Instead, the banks are hoping they can transition branches from cash-handling (which is rapidly becoming redundant) to providing value-added financial advice.