If, perhaps the baby boomers found the unfolding of information age and technology as an overwhelming experience, the millennials are all set to face still greater challenges, in the more astounding ‘Digital Age’.
Digital technology has changed our lives. It has altered the way, we think and act. It is today inconceivable to be without internet, Google, Facebook, Instagram, Face Time, etc. The speed of communication has outraged all standards of measurement. This speed is equally matched by the amazing reduction in the cost of conveying information, either through voice or data sharing. The related crypto universe’s total assets today are expected to exceed $307 billion. The digital space has no boundaries or limitations. Blockchain for example, is an amazing platform, imagine that there is an FM frequency as a large plank of wood, that is divided, into separate and distinct channels, some playing classical music, country music, Qawalis, etc. it is a wooden plank that has no beginning or end…limitless opportunities to create new and fresh assets on the same frequency modulation platform. The explosion in the digital space is creating assets, new and refreshed, whose price is on the increase and therefore invite focus from the governments and regulatory bodies.
Cell phones have not only changed our lives but also the entire financial industry. The entire gambit of financial products and services are now available on the cell phone in your palm, with no limitation of time, geographic zone or location. We no longer need a guide for directions, just log on to Google maps and you reach your destination. We hail rides over the cell that are at your door step in no time. One doesn’t have to walk on footpaths for a taxi, anymore. Over the last decade, customer expectations from financial institutions have undergone a radical change. Today, a bank client expects similar kind of services and responses as they get from Google, Amazon, Facebook, etc. The clients of this age would be disappointed if banks are unable to provide matchable services. Speed, accuracy and timeliness of execution of their transactions are the minimum demands of a client today. While, it may not be possible, within Pakistan’s societal and cultural standards, to do away completely with the brick and mortar branch model; it needs to be appreciated that the youthful population, which exceeds 65 percent of the total population questions the financial institutions what delivery channel you have on offer for us. Their preference is download an app and use it; the desire to visit a branch is increasingly on the decline.
Essentially, there may be no change in the fundamental role of banks, which is to collect deposits and sensibly lend to borrowers, it still is and will continue to remain the primary function. It is the rules of engagement that are going through a major metamorphosis.
In the world of banking, “trust” is a major consideration. Therefore, the fintech’s have had to go and deliver products and services through banks. This was the norm and accepted criteria until about a decade. Today, fintechs are reaching directly to clients to offer similar banking services. Bankers are in need to recognise that if they lag behind in catching up with the quality and speed of fintech services, they will begin to lose clients.
Disruption and innovation has tremendously changed the dynamics of conducting business.
Uber, which is the largest commuting (ride hailing) service doesn’t own a single car; air bnb, the largest hotel and hospitality services organisation doesn’t own a single hotel and Amazon the world’s largest ‘Super Store’ has set the highest standards of services - you can buy anything from a home to a razor. What makes these organisations different from financial institutions? It is all about customer relationship that makes them different and approachable directly. What the fintech’s have intelligently acquired is that there is more revenue in transactions, payments and assets management services, coupled with insurance products. It is guesstimated that after factoring in the cost of capital expenditure CAPEX and operating expenditures (OPEX), the average return on equity (ROE), of financial institutions is around 6 percent, while companies like UBER, report an ROE of 20 percent. The digital landscape has the following, the ‘startups’, banks and big technology companies. Will fintechs take away the branches? Are they going away? The answer is “No”. It is not likely to happen. Branches have retail benefit. They ought to be present at street level for all to see, to create the element of trust and responsibility, that being an ingredient that is lacking in a standalone fintech and above all, branches creates engagement with the brand.
In the next few years, banks that wish to remain relevant with changing market conditions, will have to unbundle their institution and then re-construct to operate within narrow space. No bank can afford to ignore the value of financial technology, for if it does so, the loss in revenue will be enormous.
Financial technologies have come up with what they refer to as ‘connected strategy”. Connected strategy profiles across latest need, awareness, research options, decide, order, pay and receive. What this entails is that bank/ fintech’s have to preempt latent needs, coach awareness, create more values through research options; decide through a curating process; followed by order, pay and receive. The best example of this is Amazon. The above process is highly dependent on data. Banks have tons of data/information, which thus far have not been put to best and efficient use; this was the vacuum that created space for fintechs. For example, if there is a regular debit in my account, for purchase of say cartridges, every three months, the bank can take the initiatives of ordering and paying on my behalf, without me having to take the trouble of firstly ordering and secondly giving instructions to banks to pay.
Another example to highlight usage of data is that of managing the pattern of viewing. Netflix decides to prompt, what movies one would like to watch. It is this subscribers’ use of data that benefits an individual from the task to search from the thousand of movies and for Netflix, it is saving in cost, because they don’t have to store what people don’t watch.
Recently, emerging out of the fake accounts syndrome and the need to adequately document within the ambit of formal economy, regulatory instructions were issued to get biometric verification done, for each and every client. Most banks demanded of their customers to visit their branches to have the biometric done … this requirement was stretched to an extent that the newspaper carried a sordid picture of an old man on a stretcher being brought into branch premises, to do the biometric verification. And to make matters even worse, the effect of ageing process, on finger print was ignored. This was all to the peril, discomfort, and disadvantage of the poor accountholder. However, within our own universe of banks, some were smart who immediately launched an expeditious program development app specific to their institution. This app is downloadable onto the mobile/cell and Lo! You can do the bio-verification that’s smart banking!
In the fast moving effort to smudge the distinctive lines and boundaries between fintech and banks, what emerges as a major challenge is the regulatory oversight. Cellular companies operate under a different set of conditionalities than banks do, while the banking side is fairly well-governed by the central bank through updated policies and procedures; the lacuna is in the area of financial services provided by cellular companies. The due diligence process and KYC standards also need to be beefed up at the cellular level.
Fintechs and banks have to coexist like the Siamese twins. They can’t remain independent of each other. Banks can still manage to survive without fintech, but no fintech can. For the millennials, banks will have to cope up with technological advancement in their products and services, to keep their interest in banking accounts.
Facebook, alongside 26 other entities is coming up in 2020, with their unique currency, LIBRA!
Bankers, watch out!
The writer is a senior banker & freelance columnist