Traditional banks are under pressure from all angles, with competitors springing up in the form of new “challenger” banks, peer-to-peer (P2P) lenders, online payment services, FX providers and even robo-advisors.
With this in mind it is easy to think that the universal bank of today could be reduced to “financial plumbing” utilities while newer innovations take over the customer facing business. But this doesn't have to be the case. I believe that there is a real opportunity here for a customer-centric modular finance world which welcomes both big institutions and small startups alike.
A tale of disruption
We are all aware that technology is disrupting many industries and we’ve heard the standard examples; Airbnb has 60 million users across 34,000 cities but owns no real estate; Uber has taxis in 400 cities across 70 countries but owns no cars and employs no drivers. This list goes on with Netflix, Apple, Facebook etc.
These are all young companies making a big mark on the global marketplace and changing the way we think about business. They provide the platforms and constructs to make capabilities accessible to a wider demographic, be it renting your rooms, monetising your app or using your car as a taxi. Take Amazon for example, and how they brought book sales online. The big value here was in providing the infrastructure via their marketplaces to let any retailer use the Amazon constructs to apply ecommerce to their sales process.
What about FS & Fintech?
In financial services, you have peer-to-peer (P2P). From P2P lending to P2P transfers, this redefines the approach to commercial models, breaking down the barriers between supply and demand.
This is fundamentally how P2P or marketplace lending adds value to financial services. Within P2P finance the model is simple: investors become lenders. Historically lenders came in the form of Banks, Financial Institutions, High Net Worth Individuals or Family Offices but now P2P platforms enable a wider group of investors to become lenders. It’s all about breaking down barriers to enable them to do this. Firstly, P2P platforms cut out the many intermediaries involved in the value chain in traditional banking. And secondly, just like Amazon marketplace, they allow many retailers to access the market. In the mortgage lending market, for example, platforms provide the underwriting skills, legal constructs, controls, payments and technology platform that lenders can use.
This democratisation of the market is compelling for investors - removing intermediation, a tax on capital.
Innovation in Banking
Peer-to-peer platforms try to think less fintech more ‘fintail’; finance + retail.
From a customer perspective company examples include Zara who can bring a product from the catwalk to the shop floor in 2 weeks; Apple with their sophisticated UX capabilities; and, once again, Amazon for their breadth of service. From a business model perspective all of these businesses have a vertical integration and full control of the supply chain, in the same way a P2P platform sources, manufactures, packages and distributes end-to-end lending products.
Banks are not being disrupted by technology but rather by customer expectations.
So, should banks fear upstarts like Landbay?
No. There’s no need to panic; financial services are undergoing an evolution not a revolution. Banks are not being disrupted by technology but rather by customer expectations.
Technology is crucial as an enabler for information businesses like banks, while providing greater reach to customers via online platforms. Technology also lowers barriers to entry through acquiring, storing and analysing data at scale. And, arguably of most importance, technology gives greater transparency on the products and services available to consumers.
However, it is the customer expectations that drive customer behaviour and thus customers themselves who are shaping the disruption we are experiencing.
Historically, banks bundled services and drew customers in with the loss-leader core bank account. This resulted in the sticky customers using other services offered by the brand like mortgages, credit cards, FX which all made the bank money. People simply didn’t move banks or look around for alternatives because it was difficult to get information and a hassle to visit branches.
Over the last 20 years this loyalty and inertia has eroded significantly, and recently with the emergence of fintech this is accelerating. More modular service offerings are being launched every day and customers are taking advantage of them. Today people use the services that best fit their needs to access a full suite of banking requirements. This means that customers have multiple accounts, many relationships and an increasingly complex FS environment to navigate.
With this backdrop of modular services and the complex many-to-many relationships, I believe that there is an opportunity for the taking by incumbent banks who today have customers and breadth of service offering, but who are restrained by large legacy cost bases.
There are two options: either banks can continue to stand back and watch as modular services take functions away from them. This will result in them being left as mere “financial plumbing”, while other players spring up to provide aggregation models using APIs to create the omnichannel experiences that customers are demanding. Or, they can embrace the modular customer centred ecosystem and become the aggregators themselves to partner with and endorse the best-of-breed providers of each service.
This means that they don’t try to compete, pouring time and money into re-building their legacy systems, but instead monetise these functions through partnerships. Investment in sharing data and facilitating a plug in service architecture will pay dividends.
This works for the big institutions who leverage their core capabilities and customer base. They monetise the functional areas where they have been losing ground without the need to invest and re-brand.
This works for the modular service providers, like P2P platforms, who gain access to wider customer bases while focusing on the service offering and are incentivised to stay ahead of retail demand.
And most importantly this works for the customer who gets to access the best services in one single, simple environment. The plug-in API architecture allows changes in modular services to be directed by customer demand and therefore to continue to give them the best products to meet their requirements.
It will need a change in mindset to make it happen, but I believe that big institutions and modular service providers can work together to build the best services for the customer.
Julian Cork, COO, Landbay. Julian Cork joined Landbay at the start of last year following a long career in large financial services firms – predominantly in senior roles at Macquarie Group in Sydney and at JPMorgan in London, NY and Tokyo.