Headlines from around the world in 2016 grabbed our attention with Brexit, Trump, a refugee crisis and wild fires in Fort McMurray. Despite economic hardship in some countries and prosperity in others, there is no doubt that technology played a significant role – both good and bad – in shaping the business environment in 2016. The ‘sharing-economy’ – much like the terms millennials, unicorns, blockchain and big data – is now part of the nomenclature of business.
An assessment into the future of Canadian retail banking might predict that significant market share will be stolen from traditional “big banks” through a combination of the sharing economy, disruptive financial services tech companies (FinTech), and a continued increase in comfort by consumers to use and adapt to these new platforms. The financial services industry is about to go through a major transformation but, at the same time big bank market share in Canada has continued to grow in the face of such a dynamic and disruptive landscape.
The key for the future success of the big Canadian banks is not necessarily to be first movers in all things tech, but rather to find ways in which they can leverage these new technologies to provide additional value to their customers and to tap into customer value segments that they could not fully exploit before. With their track record of prudent fiscal management through crises, enhanced connections with their customers, and leadership that recognizes the changing dynamics of the industry, traditional banks are well positioned to tackle the threat of technology in the financial space.
Ana Botin, Executive Chairman of Santander Bank, once described Apple Pay as “not a good business for Santander, but a great business for its customers.” With the significant usage of the Apple iPhone in the UK and the increasing adoption rates of mobile pay solutions by its consumers, Santander saw an opportunity to provide additional value to its customers by being the first bank in the UK to offer Apple Pay to its customers. Despite initial perceptions by Santander Management that Apple Pay would chip away at lucrative transaction fees, Santander has seen two benefits resulting from their decision to offer the service. First of all, they had tapped into a specific customer value segment. Some customers, the early adopters, requested access to the service. As the first institution to offer the product, clients flocked to Santander from other banks simply to be able to use the service. As well, iIn collaboration with Apple Pay, Santander was able to offer a service called “Spendlytics.” Spendlytics gives clients the ability to better track their finances and show where their money is spent, resulting in increased new client acquisition and better retention rates.
In an attempt to find and leverage synergies with emerging technologies, RBC has teamed up with Uber to provide additional reward points on RBC credit cards when registered with an Uber account. The incentive is for clients to use their RBC credit cards every time they travel with Uber. This deal has translated into increased credit usage by RBC clients and has effectively increased the interest income generated by bank credit cards. Although Uber might not represent a direct competitor in the FinTech space, it is highly indicative of the ways that big banks can use their existing infrastructure, client patronage, and institutional credibility to tap into and leverage new and existing technologies to generate returns for their shareholders.
The amount of venture investment that has gone into FinTech start-ups has many concerned about web/internet security as there have been a growing number of examples of Fintech data breaches. These breaches may help to give the big banks another edge– at least in terms of the adoption rates of new technology. Customer perceptions about security will favour the institutions that have existed for decades and, if needed, the ability to see someone in person will always trump (no pun intended) a call centre when it comes down to managing perceptions about the security of one’s finances. Determining the point to which customers will trust a small start-up with their personal information will play a key role in determining the adoption rates and inevitably the success of these new ventures.
As competition and the inevitable war of attrition in the Fintech industry heats up, traditional banks can also start to employ some of their expertise and deploy some of their capital into investing in, or acquiring, some of these start-ups. Banks not only have the capital to invest but also have the expertise and resources to properly evaluate trends. For example, during the Interac boom of the early 2000’s, RBC and BMO jointly acquired Moneris Solutions because they recognized the threat and saw the opportunity.
Amongst the many factors that contribute to the success of disruptive business models is their ability to move faster than the regulatory authorities. This has given them a significant competitive advantage, at least in the short-term. However, the short-term success of these companies might not be indicative of the long term prosperity as regulatory authorities catch up and begin to monitor these new markets. From a global perspective, this has meant a forced divergence of their own policies and growth strategies due to the regulatory differences region to region. For customers, this might be a nuisance with regards to access, but alternatives still exist. In the financial services sector, the prospect of increased regulation in FinTech might actually prevent customers from adopting the technology in the first place because of the potential future risk of regulatory changes. Existing banks, especially in Canada, have a leg up once again whereby new technology will be integrated and governed by existing policies that already adhere to the Canadian regulatory framework.
Amongst the most prolific of the FinTech models has been the peer to peer lending model whereby financial intermediaries are bypassed and funds are directly loaned from one person to another. “Sophisticated algorithms” are used to determine the credit worthiness and ultimately the risk of each client. While experts estimate that this will draw billions in revenue out of the consumer loan markets’ revenue over the next ten years, most critics agree that the current inflated valuations, inexperienced players, and a comparison to the mortgage model that fueled the U.S housing meltdown may point to a bubble rather than a long term business potential – a lot of which we are seeing already.
Technological innovation and new products in the finance sector may not be enough to transform an industry, they might simply tap into a segment of the market that wasn’t serviced properly or at all before. As these financial tech start-ups consolidate and attempt to offer explicitly different services to customers, there might, in fact, be enough room for all players to each have a piece of the pie and continue to grow.
The aforementioned, in addition to the variety of service channels that big banks already provide their customers with ,will make it difficult for independent tech companies to truly disrupt the market. Traditional banks have a proven expertise in keeping pace with changing customer preferences, and what the big banks might lack in speed and agility they make up for with expertise and access to the customer.
There is no doubt that financial technology will change the way we do our banking, but big banks will continue to have an advantage over the competition because of their history, their reputations, and their existing relationships with customers. As a result, the organizations that provide banking services in the future might not be notably different than the ones we use today.