It doesn’t seem that long ago that I would head down to ‘Blockbuster Video’ on a rainy Sunday afternoon (having put a roast in the oven) and choose a video to watch, and maybe some popcorn.
Things have changed bit since then, for a start I would have to fight the kids for the TV, and if successful I certainly wouldn’t need to leave the house - I could find just about anything using Netflix or Apple TV. The trip to Blockbuster seems a distant memory now, and the same can be said for visits to my bank branch.
Bank branches still exist of course, although there are fewer of them. Whenever I meet with retail banks they speak about becoming ‘Digital’ and trying to get as many customers as possible to perform their transactions using their digital channels. They hope that the branches can be used by their most valued customers for the high-value transactions, and that the branch staff can use their skills to cross-sell more products to each customer.
The reality is somewhat different. Most of the profitable customers are happy to bank online, and many of the people who visit branches just take up time, and don’t justify the time taken to serve them.
Banks tend to think of their online channels as extensions of their existing service, and often the experience and the products are the same regardless of channel. This has worked for the banks - it’s cheap to drop a new website or mobile app on top of an existing service - and has resulted in lower costs for the bank, but an identical product for the customer.
Enter FinTech: a new generation of agile, dynamic, digital-only services which have entered the marketplace in the last few years. They tend to be smaller, have low costs, modern technology platforms, and a desire to take the most profitable customers away from the banks. And so far they seem to have been successful. Why? Because not only do they have nice apps and easy-to-use websites, but they have compelling products and can use their low cost-base to undercut the banks for similar products.
FinTech companies have also introduced disruptive new business models, like peer-to-peer lending (Zopa), crowd-funding (crowdcube), and marketplace lending platforms (Funding Circle). There are also companies who are developing a new, safer transactions platform, using a distributed ledger based on Blockchain - the technology that supports BitCoin.
Firms like Nutmeg and Betterment have taken the wealth management concept, and delivered an online wealth platform which gives investors a low cost investment service, and a lower entry-point to quality advice - and have taken significant levels of investment already.
So is this the end of banking? No. But is this the beginning of a new era of financial services? Most certainly yes.
Banks have to respond to their new competition. They can’t just respond with a flash new website or app. They will have to reinvent their business models. They will need to take an axe to traditional ways of working, and find a way to run their businesses much more efficiently.
How can they do this? Well they will need to start by taking an analytical approach to find out where the costs lie within their organizations. They will need to figure out who are the profitable customers and which products those people want, which are the profitable products, and where the profitable markets are. They will have to figure out how to use this information, and how to get it to decision makers, fast. Massive cost-cutting has already started in banks, and this is likely to continue. Products will be dropped, customers will be allowed to churn, and banks will have to focus on the areas they can make money from.
It’s not all bad news though - banks do have loyal customers, and they do have brand equity. Recent crises have forced the banks into more robust risk management regimes, leaving customers with a greater level of security. Not everyone wants to change their bank - not today anyway.
So the end of banking isn’t imminent, but a more competitive landscape and greater consumer choice is. I can’t believe it has taken so long.