Alternate Banking – The Plastic Comes Off

The Corona pandemic has been able to do what even the most advanced technologies and their advocates could not pull off – banking, as we know it, has changed – to digital, hands-free, remote, branchless and what not

They had it all the time. Even if they did not, all they had to do was to stretch their hands and grab it. We are talking about banks and their customers alike. Yet, somehow, technology-enabled banking was not as pervasive, exciting, mint-fresh, non-hub-and-spoke and simple as it seems to be now.

From Banco Santander in Spain to financial entities in Africa, Brazil and India; a lot of traditional approaches have made way for digital routes, tech-led formats and alternate payment systems.

The paper ‘Dirty Money: The Public Health Case for a Cashless Society’ had come a few years ago warning about the various ways money (smaller denominations, in particular) gets contaminated when it stays in circulation. But the way regulatory reserves and institutions have been quarantining money right now (despite the debate about whether a currency instrument can be a virus carrier or not), that is a good enough hint of how much the Covid-19 nightmare has tossed, tumbled and flipped this industry.

Look at a Cognizant’s Centre for the Future of Work report ‘After the Virus’, and it is astounding to see what shape banking will take in the next five years. Only 15 per cent of organizations dared to call themselves digital transformation leaders before the pandemic. But 28 per cent global bankers are already feeling the pressure of the new competitive environment as per a study by ‘The Economic Intelligence Unit’.

As many as 37 per cent are set to launch an open banking strategy in the next five years – and as a top priority. Some 29 per cent fear the hybrid threats that will emerge by 2025 as more and more big-tech firms (Apple, Google etc. we suppose) shake hands with fintech companies.

Contrast this to the world before Corona hit the industry’s guts. An Accenture report had projected in 2019 that 35 per cent of all bank revenues faced risky contours thanks to tech-savvy fin-techs by 2020. A PwC 2019 Consumer Digital Banking survey revealed that only 52 per cent of Gen Z people (against 72 per cent baby boomers) trust their primary financial institution the most with their money, and 25 per cent Gen Z people do not even own a checking account. The survey underlined the aspect of fickle consumers and lower switching costs to remind banks that they need to make relentless efforts to earn and maximise customer lifetime value.

In the ‘Deloitte 2020 Banking and Capital Markets Outlook’ it was noted how banks and capital market firms need to fortify their core foundation towards a future that was open, frictionless, transparent, tailored, contextual, data-driven, secure and intelligent, among other things.

It talked strongly about ‘technical debt’ with the need to modernise legacy systems, and the pitiful state of data (especially on access and quality levels). The report unravelled how most banks were far from what where they would like to be in their digital transformation despite technology investments going north in the last few years.

About 38 per cent US consumers experience an issue with their credit card payments the previous year: Deloitte Insights – Payments survey 2019

By 2022, many banks were expected to spend a major portion (nearly one-half for North American banks and one-third for European banks) of their IT budget on new technology. Managing remotely (57 per cent), managing alternative workers (32 per cent) and leading amidst ambiguity and complexity turned up as core attributes of 21st-century leaders in the global banking and capital markets industry.

Open banking was slated to take hold in 2020 in many regions with end-to-end digital experience becoming a decisive factor – from what this outlook surmised.

Celent estimates had put a rough figure of $297 billion that banks had announced for big-ticket, multi-year digitization projects by 2021. Turns out that all those future blueprints have become mandatory manuals now. Plus, the comfort of those long spans has vanished. Everything has to be embraced in a blink – whether it is the idea of going branchless or tossing out legacy systems or getting mobile-ish, AI-ish and chat-botish for the customer tucked inside the house.

Press The Digital Button – Now a Lifeline

Meng Liu, analyst, Forrester tells us if there is, indeed, a new tipping point for digital banks and whether we are inching closer to truly-digital banks. “The tipping point is already there w/o the COVID-19. The trend for banks to go digital is inevitable and COVID-19 will only accelerate it. There are several reasons for the trend. Firstly, customers’ behaviour has been changed. Retail banking customers expect their banking services as digital as daily services like online shopping. Corporate/SME banking customers are expecting the same seamless digital experience as retail customers do. Secondly, some innovative digital banks have set the bar high.”

Liu counts WeBank as a truly-digital bank here. “It started from scratch without any legacy banking system. Everything is built on its private cloud and it has distributed architecture. This allows it to have a cost-effective technology model that can provide services at much lower costs.”

Shachindra Nath, Executive Chairman at UGRO Capital affirms that the COVID-19 impact has demonstrated two widely divergent facets of the digital lending industry. “Globally, fintech lenders have moved to the forefront as the go-to providers of debt capital for small businesses due to their speed and agility in providing their customers with unique, tailor-made solutions.”

There is no going back from the current inflexion point that the industry has taken. Being truly-digital would not be a luxury but an imperative now as Harish Prasad, Head – Banking Solutions APMEA, FIS examines the readiness and maturity of Indian players in the industry. “India has a few banks that claim to be truly Digital (e.g. DBS Digibank) and many traditional incumbents that offer a digital-focused banking brand (e.g. Yono, Kotak 811 etc). The latter greatly outnumber the former, and at the same time, we are seeing the emergence of the new business models of neo-banks which are really fin-techs fronting the customer banking relationship while not being the back-end bank that services the customers (e.g. Open).

Avoid the Banana Peel Please

There is no dearth of mistakes that both the sides could make – digital as well as legacy incumbents. Many digital banks tend to deliver very “sameness” digital services that many traditional banks have already achieved. Many digital banks offer great financial incentives to their early customers. However, they did not constantly do so and some of these early customers will easily switch to competitors if they stop doing financial incentives. The key is to have a sustainable cost-effective model and provide cheaper products and services while maintaining profitability.

In an interesting twist, the challenges for digital-challenger banks are going to rise and gain gravity as well. As per Forrester, they were already experiencing issues before COVID-19. The economic downturn that follows will force many of them to shut down.

Many Digital Banks Will Struggle To Scale Profitably Amid The Economic Slowdown, But A Handful Will Innovate And Thrive.

Digital banks have few exit options as a result of the COVID-19 crisis: pivot, sell, or fold.
(Source: Forrester’s estimates)

Prasad recommends that Digital-only banks need to focus on establishing compelling value differentiators and push changes to consumer behaviour. “Preserving service quality will be the key for these banks and ensuring that operations work seamlessly in the midst of all the restrictions will be a true test for these banks.”

In his reckoning, Digital specialists who can weather the storm and cross over to the other side while actively managing and addressing customer risk perceptions shall see long term growth and success.”

Liu warns against the tendency to cannibalise their parent banks’ customers if the digital bank is set by an incumbent bank. JPM’s Finn is a typical example. It cannibalised its parent bank’s customers and was shut down eventually. As to Legacy banks, they should understand their customers in-depth and deliver differentiated value to customers.

If the product and service can be achieved by the legacy bank, it makes no sense for them to set up a separate digital bank entity to do so. They should ensure that the digital bank services a different segment of customers. For instance, the digital bank only serves underbanked and “long tail” customers to avoid cannibalisation.

Decentralise and Blockchain-ise

As to the injection of more decentralisation, Prasad opines that one aspect that could change in various industries is a conscious de-risking of supply chains for large globally inter-connected businesses, and to the extent that this applies to banks, this could lead to some forms of changed behaviours. “I am not sure if decentralisation here implies strengthening of local upstream and downstream networks for banks, but this is unlikely. Large banks have flourished with advances in processes and technology and these are usually correlated well to centralisation, and we don’t see any of this changing.

Yes, seconds Liu stressing how the digital bank landscape is leaning towards decentralisation. “The power of incumbent megabanks is weakening while that of emerging of Fin-techs (Revelut) and tech-giants backed digital banks (WeBank and MYBank) is rapid. The disruption is already there and will only be accelerated in the near future. The future of financial services will be decided by the experiences that a financial services firm can deliver to its customers (where many new digital banks are leveraging tech-driven innovation and agile organisation to constantly deliver differentiated experience), not its products or channel offerings alone.”

The idea of blockchain and open banking is now no more a far-off future plan. Sunit Vakharia, CIO at UGRO Capital shares that the company is closely working with a neo-bank partner and will offer SME lending solutions on their platforms. “We also believe blockchain technology has tremendous potential to revolutionize supply chain business where we are doing significantly well. We have collaborated with MonetaGo’s blockchain network to strengthen our supply chain portfolio. We will be able to leverage the solution to mitigate risks and to authenticate invoices and E-way Bills thus resulting in the elimination of physical documents and faster disbursals. At this stage, we are not finding any collaborative opportunity in the digital currency space. But we are continuously tracking this interesting space.”

India Post Payments Bank IPPB, which holds a strong presence in rural reach in India and has been adopting advanced technologies like QR codes, is also considering Blockchain, albeit, for internal systems and collaboration for now.

Unboxing the Next?

Liu observes that currently, banks are using cloud more for their general functions like HR and Accounting rather than their core businesses (loan, deposit, payment). But in the future, there will be more banks using cloud-native and cloud-based applications for their core business functions.

Nath suggests that the more evolved and mature fin-tech in terms of risk and credit underwriting are primed to emerge as the big winners out of this transitory phase. There will also be more widespread adoption of digital lending – not only among the subprime borrowers, as is mainly the scenario at the moment, but among the broader small business landscape as well.”

From going digital to embracing decentralisation, blockchain and AI to even avoiding the old-social distance with technology players and third-party entities, a lot about banking has changed and will continue to get more edge.

The bubble-wrap has been stripped off and now begins the true test of banking in a quintessentially-digital world. ‘Pop’, goes the sound.