Banks’ digitalisation will affect us

If you are not working at a bank, you may wonder why you should bother about banks digitalisation.

The reality is that, like it or not, when banks cough, individuals, companies and even sovereign states, catch a cold. Our Greek friends know what I am talking about.

I will focus here on three areas of change that will have a decisive impact on our lives:

  1. Banks’ digitalisation of their relationships with customers
  2. Payment systems
  3. Banking credits

But, first, let us have a quick look at the numbers to size the magnitude of the change. According to Roland Berger, Banks are prepared to spend up to 20% of their IT budget to develop new digital revenue sources:

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Source: Roland Berger executive retail banking survey, Nov. 2015

However, banks’ digitalisation is still focusing on securing present business and improving client experience rather than on generating new revenues. With the digitalisation, Banks are looking to:

  • Be more objective using Artificial Intelligence (AI) and algorithms
  • Be more efficient by improve their processes and managing their risk
  • Be more response and quicker in their decision-making process
  • Be more informed by sharing data, criteria, and results with third-parties
  • Be more creative and innovative by blending talent

And some of the side effects are widely commented in the press:

“The most important Hedge Fund will replace their managers with AI.” The Guardian

The digital revolution will increase unemployment.
Der Spiegel

Banks’ digitalisation of their relationships with customers

One key message here is that for banks to be successfully digital, they need their clients to be digital as well. In Spain, only 1% of the companies sell on-line.

Will banks have enough clout to force their customers to harness the digital transformation?

My answer is “yes!”.

Despite the huge concentration of financial entities in Spain, from close to 100 entities down to 16, the bank of Spain’s objective to reduce this number to 4-6 banks. With the concentration comes the closing of the branches and sooner or later, we will have no other choice than to deal on-line, in mobility or to speak to robots.

Receptionist robot

In Japan, the use of robots instead of human receptionists is being piloted, Reisebank

Payment systems

The foundation for pan-European implementation of instant payment has now been laid and shall be launched in November 2017. Swift has recently announced the new launch of the Global Payment Innovation Initiative (GPII).

The number of new alternative payment systems and solution is skyrocketing. Fintechs the like of Circle, Klarna, PayPal, Adyen, Payscout, or Apple Pay are putting 20 to 30% of the banks’ revenue at risk.

Mobile payment is becoming a trend.

A sample of fintech payment companies:
Samples of fintech payment companies

New solutions  like ripple blockchain offer numerous advantages:

  • Higher security with cryptography
  • Decentralised accounting without the need of a central authority for clearing
  • Real-time clearing (8-10 seconds)
  • Less transfer cost (down 50%)

How will the deployment of those new payment systems affect us?

Will this pave the way to the end of cash money?

Is it fair to believe that the usage of debit and credit card will decline?

Banking credits

Banks are digitalising their credit process to increase liquidity and reduce processing time and cost, however, reality is that the volume of credit available depends on monetary policies.

At present, the demand is below banks’ expectations, despite low interest rates and more flexible credit ratings.

In my opinion, this paradox is due to two major factors:

First, banks fell off their pedestal because of the subprime crisis. Corporates and individuals are less inclined to trust them and are either containing their debt-to-equity ratio or looking at alternative sources of funding.

Second, banks are facing the growing competency of new fintech companies offering crowdfunding, crowdlending and other banking services such as foreign exchange and on-line investment advisory in a sector that is not as regulated as the traditional banking sector.

Consequently, banks have to face the competition of a myriad of newcomers the like of Indiegogo, Kick Starter, wonga, Lending Club, Crowdfunder, Funding Circle or Wonga.

Samples of fintech companies:
Samples of fintech companies

How will this affect us?

The good news is that increased competency has pushed interest rates to a historic record low.

The bad news is that banks a retaliating with higher maintenance costs and lower interest rates on deposits.

How will the future look like?

Thanks to Donald Trumps’ policy, interest rates shall raise and traditional banking services will slowly recover some colours. However, digitalisation is here to stay and fintech competencies will not abate, rather the opposite. Margins in the banking sector are unlikely to go back to their historic high.

Bankers will have to live with lower bonus and get out of their comfort zone to create innovate business models if they want to stay on top of the game.

A world no longer ruled by bankers will profoundly affect all of us, hopefully for the better.
Christophe Schwoertzig

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