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Money Matters

Digital banking

By Mansoor Ahmad
Mon, 05, 16

FINANCE

Financial institutions the world over have recognized the importance of financial technology after being hammered by startup fintechs that seamlessly started grabbing the share of banks through different high tech products acting as branchless banks.

It is true the banks have been using computer technology since decades but new technology has gone beyond computers that could provided various financial services like purchase and sales of goods though handheld smart phones. The consumers now want transfer of funders through one click of their mobiles. They demand the bank statements online. In fact they consider going to a bank branch a hassle.

 They have a reason to aspire for seamless service 24/7. The technological applications have ensured that they can transfer money or get credit in their accounts even on weekly or other official holidays. They do not have to worry about the banking hours in their branch. The speed of service is so efficient seen before in financial services.

In simple words financial technology or fintech relates to innovations to financial processes, products and services. Big banks all around the world are now spending liberally on fintech. Bank of America for instance spends $3 billion a year technology initiatives. JPMorgan Chase chairman also spent about $3 billion on new investments in technology last year.

Pakistani banks are also investing heavily in digital technologies but still lost a major chunk of the market because of various cellular phones ventures and other similar offerings that have tapped the majority of population that did not have any account. The speed with which these platforms transferred money eased the misery of workers employed far away from their homes in villages. Now the transfer of the money they send back home is executed on one phone call. The recipient if at that moment is at any of the outlets of these platforms gets the money promptly with proper identification. The chances of fraud have been completely eliminated. Earlier it took days and weeks to send money through banks or money order. The hassle to the sender and recipient was uncalled for. Now most of the Pakistani banks also transfer money online promptly. The cheques can be deposited through any of the machines installed in the branches of some banks.

Even in North America despite this heavy spending on the digital technology by the banks, the banking sector generates around one percent of their consumer banking revenue from the digital market.  These banks are still in the process of shifting to new digital business models.  Now they have some share in the digital economy and have started shielding their operations from sudden attacks by startups. Financial experts are hopeful that this share will rise to 10 percent by 2020 and 17 percent by 2022. This means that these banks will be partly increasing their share in digital economy by eliminating some weaker digital launchings and partly due to overall increase in digital transactions. It is worth noting that even in China where the controls on transactions are stiffer, 96 percent of all online sales in are conducted without a bank which three percent higher than most developed North American economies.

It has been found that 59 percent of the banks’ earnings flow from pure fee products, such as advice or payments, as well as the origination, sales, and distribution component of balance-sheet products. However in these areas, returns on equity (ROE) average an attractive 22 percent. This is much higher than the 6 percent return on equity of the balance-sheet provision and fulfillment component of products (for example, loans), which have high operating costs and high capital requirements.

The fintechs or big nonbanking technology companies in e-retailing, media, and other sector try to exploit this mismatch in banking business model. They are aided by shifts in customer behavior and technological advances and shifts in consumer behavior which provides them with a chance to weaken the heavy influence banks exert on their customers. Challengers slice off the higher-ROE segments of value chain of banking in origination and sales. This leaves banks with the basics of asset and liability management. It is worth noting that fintech players do not desire to operate as pure banks and do not want customers to transfer all their financial business at once. Instead they offer targeted (and more convenient) services. They offer the customers’ services at much lower cost on avenues from where banks generate high income.

The banks in developed economies are making some investments on upstarts as well to make them partners in trade instead of acting as disrupters of their business models. To make the impact positive, banks are acknowledging that they need to shake themselves out of institutional complacency and recognize that merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence.

Banks are now fully aware that because of fintech platforms like Paypal and Apple Pay and Google pay and everything else ‘pay’ have emerged as an alternative to, say, credit card payments or direct deposits.  They have to come up with products that bring back the consumers to traditional but revamped banks. That’s happening in a world full of innovative devices. In emerging markets where banks have far less reach, for example, new platforms can be exploited to serve the unbanked market.

Mobile devices are being increasingly used in Pakistan for payment services. The apps developed by experts are easy to use even by least educated population. The mobile devices are not a substitute but an enhancement of payment process. It acts as facilitation for the population that has no access to banks. Regulations are still a challenge for this portion of fintech, especially those with a social media component.

The banks in Pakistan should not be complacent as the digital technology has just started impacting their business. They should realize that raise of digital innovators in financial services presents a significant threat particularly to retail banks. Banks usually generate value by combining different businesses, such as financing, investing, and transactions. They serve their customers’ broad financial needs over the long haul. They offer basic services, such as low-cost checking, but the sticky customer relationships they develop allow them to earn attractive margins in other areas. These include investment management, credit-card fees, or foreign-exchange transactions.

The writers is a staff member