The end of banking and finance as we know it?
“Banks are dead, long live banking”. A popular adage that is loosely used to describe recent evolutions in the financial industry. But does it merit value?
The financial sector has weathered a number of storms over the past few decades, ranging from the introduction of telephone and internet banking in the ‘80s and ‘90s, to the more recent global financial crisis and the rise of Fintech. Today, the industry faces a plethora of challenges. Many of them relate to the low interest rate environment, as benchmark rates continue to hover close to zero or negative territory. This, in turn, affects profitability in the financial sector, particularly for banks which are generally highly reliant on interest income. Adding to the equation the high levels of liquidity in the economy and an increase in regulatory demands places significant strain on the industry.
Regulation sparks innovation
Though traditional banking models have continued to remain resilient in the face of adversity, a new challenger by the name of ‘open banking’ looms around the financial cornerstone of our economy. The concept is a result of the recent regulatory trend that is seeking to return control and power over data and finances to the customer. A combination of payments and data privacy laws (i.e. PSD2 and GDPR) ensure that, with your permission, you can allow payment service providers access to existing personal and transaction data held by credit institutions. As such, your bank will no longer hold a monopoly position over your information and you will be able to compare, combine and switch between service providers more easily. The phenomenon has contributed to making data one of the most sought-after commodities of our time.
It appears that stakeholders, ranging from regulators to entrepreneurs and customers, are coming to terms with Bill Gates’ visionary insight that “we need banking, not banks”. This can be attributed to a loss of trust and confidence of consumers, brought about by the 2008 cataclysm, combined with regulatory initiatives and advances in technology. Owing to these developments, doors to entirely new opportunities, products and services have been opened.
Leading this industry revolution are the eager and agile start-ups, challenging the norm and pioneering customer-centric innovation. Instead of the often long and tedious processes involved in managing your finances, they aim to offer a one-stop-shop for all your needs based on collaborative business models that are often supported by partnerships. On the other end of the spectrum, tech giants such as Amazon, Apple, Google, Facebook and Alibaba are looking to pave their way into the financial services sector, further broadening their wide arsenal of service offerings.
Threat or opportunity – the Maltese economy
As is often the case, where there is threat, there is opportunity. Fintech start-ups may have the advantage of being innovative, responsive to customer needs and efficient, but experienced market players have their own strengths. Incumbents have the power of the existing customer relationship, their longstanding industry knowledge and reputation, as well as the accompanying data. These characteristics are particularly relevant in the Maltese context, given its traditional and predominantly cash-driven nature. Though the younger generation tends to use a variety of payment instruments, this argument pales against the backdrop of an aging population.
Nonetheless, taking into consideration the role of tourism and the expatriate community in Malta, international forces may push traditional financial service providers to transform at a faster pace. European initiatives such as passporting of financial services and the creation of the Banking Union aim to create a borderless financial sector, making international competitiveness crucial to survival in the long run. This further emphasizes the importance for the Maltese sector to keep up with its international competitors. The Maltese Government welcomes the idea of financial innovation, with Prime Minister Joseph Muscat stating that he “welcome[s] anything that disrupts the market and traditional players”. Reflecting the government’s view that “if people aren’t satisfied with [Banking] services then we should welcome competition”.
While Open Banking won’t lead to the ‘death’ of traditional banking, it does represent a significant opportunity to innovate and transform core services, diversifying away from the traditional interest-income-centred model. Regardless of the route taken by incumbents and start-ups, customers remain the key to survival. Expectations are becoming increasingly shaped by other industries, further ahead on the digital curve, causing pressures for change. Customer data carries significant value and can be used to improve user experience by tailoring services and offers to customer needs, and to anticipate their future needs. Any gaps in service offerings can be identified and filled either internally or via partnerships. This said, industry boundaries are likely to become blurred, with non-traditional players moving into banking and vice versa.
For small and medium-sized enterprises, access to real-time data has the potential to be transformational, with funding application processes becoming easier, faster and fairer whilst causing less of an administrative burden. For consumers, open banking leads to a more holistic view and personal ownership of data and finances. New applications designed to collate and analyse data make it easier for consumers to control their expenditure and invest wisely. Ultimately, the financial sector will be competing in terms of customer experience, pushing established players to embrace change as they face competition from challenger banks.