Technology Photograph:( Zee News Network )
Adoption of technology and digitisation is not only leading to new business models, but some of the traditional functions of banks are being encroached upon.
Disruption has become a clichéd word almost rinsed of meaning by its quotidian use. But, this does not divest the term and its practice from its potency. Disruption in the world of business, finance and commerce is real and it is forcing incumbents to adapt, adopt or wither away or even die. One such sector that is being disrupted swiftly is banking where the adoption of technology and digitisation is not only leading to new business models and ways of working but some of the traditional functions of banks are being encroached upon.
The function that is perhaps feeling the pinch is retail banking and payments system thereof wherein nimble disruptors are taking over both the retail function and offering new products and services. To state the obvious, this trend known with the neologism ‘fintech’- a combination of finance and technology- has been enabled by the forces of technology, advances in computing, communication and the widespread penetration and use of smartphones, altering the competitive landscape of banks in the process.
Nimble players are foraying into the retail banking space and offering stand-alone retail and payments services at the click of a button with important addons like security architectures that ensure a smooth and secure flow of monies. In essence, apps on handheld devices are competing vigorously with incumbent banks that are burdened with legacy systems and old ways of working. While it's unclear what the customer attrition rate is from traditional banks but the ease of using an app for banking services intuitively suggests there is and will be the migration of customers to apps offering these services.
The how’s of the encroachment of nimble fintech players on the turf of banks can be gleaned by understanding the value chains of banks. Broadly speaking, every firm is comprised of a value chain. The forces of technology, globalisation and advances in communication allow a given firm, say a bank, to disaggregate its value chain- outsource parts of it, delegate responsibilities, rejig relations with suppliers buyers and so on. This is the traditional view of the value chain where it was assumed that the firm’s given approach to it was contingent, to a large extent, on the nature of competition and profitability potential thereof in the industry.
But now the nature of competition has changed; it is not merely between incumbents in either a static or dynamic competitive environment but new players are disaggregating the value chain of a given firm, sector and then eating away into the business or a component of the value chain of the firm or business. In banking, the first to have borne the brunt of the assault is the retail function. To extend the analysis, this assault might even be the first and not the final one. That is, other aspects of the value chain of banks might be attacked as technology makes advances with banks remaining a husk of their former selves. But, for the purposes of the analysis here, the unit of analysis is the retail function of banks.
Given the disruption and entry of new players, rapidly falling entry barriers, is retail banking dead then? Will an app be your retail banker in the near future?
While much remains in the domain of the ‘unknown unknown’ what may be stated with a degree of clarity is that there is a clear threat to the retail function of banks. But, this does not mean that banks will divest themselves of their retail portfolios and payments systems and cede space to nimble, new tech-savvy players. What this means is that the form and delivery of retail banking is and will change. There will be agile players(basically apps) that will offer retail services, arbitraging interest rate differences and exchange rate differentials in payments systems and also offering a compendium of allied services. But, traditional banks will not give up and cede this space to these players. Their best bet is to actually think like disruptors and compete along with the same dynamic and form. This is what many are doing.
In essence then while there is talk of the death of retail banking but this may not come to pass as banks will compete in a different idiom and take the disruptors on their own turf and beat them at their game. Or, as is happening in some cases like say, Santander, incumbents will acquire the disruptors. Whatever way competition in banking will evolve, it is that the form and shape of retail banking will change but the function will remain and even be part of the remit of incumbent banks’ functions. But, all in all, the nature, form and scope of the competition will ensure that customer is king(or queen as the case may be)!
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)