Disruption in banking: Could banks become the next dumb pipes?
The banking landscape is undergoing the fastest change it's ever seen.
The banking landscape is undergoing the fastest change it’s ever seen. Well funded tech startups along with the established tech giants are arriving in the financial services sector at pace. In these fast moving times when those with the best digital experience win out, might the retail banks, following the mobile operators before them, become the next dumb pipes?
While it’s difficult to ascertain the true origins of the term dumb pipe, its’ use became more widespread following the launch of smartphones. At this time, and particularly with the arrival of the iPhone, the operators lost control of the customer experience relegating them to merely transporting data to drive the services and applications available in app stores.
As the experience shifts to the smartphone interface, and the third party app developers designing services for it, the operators are experiencing a drop in engagement threatening the opportunity to retain, cross-sell and up-sell.
Core services that the operators traditionally provided – voice and SMS – are now being offered by new entrants, the most recent and high profile examples being Whatsapp, Viber, Line and WeChat. Perhaps a lead indicator of their increasingly challenged position is data from Ofcom reporting that SMS volumes dropped roughly 25% between 2013 and 2014.
While the story is still playing out for the operators the future looks challenging. Apple’s recent iPad feature known as ‘soft-sim’ allows a user to seamlessly bridge operator networks, which further reduces the need for an ongoing relationship with a specific operator. Further out perhaps might be Facebook’s and Google’s efforts to deliver internet access via drones and high-atmosphere balloons, challenging the traditional strength that network masts offered the operators.
So could a similar series of events happen in banking? Might they be next to be disintermediated from their customers?
There seems to be a few areas in which this might happen: digital wallets, personal finance managers (PFMs), social payments and international remittance.
The digital wallet market has been around for a few years now but with no clear leader emerging. Apple might change this and in doing so drive forward the whole market with it following the launch of Apple Pay a few months ago.
While Apple Pay has yet to launch in the UK it has reportedly gained decent traction in the US despite a challenge from some leading retailers there. One of the barriers seeming to slow the faster growth of digital wallets is the in store technology that enables the payment.
These services prevent you from having to get your real wallet (and the plastic it contains) out of your pocket to pay in a shop or online, simplifying the process in doing so. It’s still early for the digital wallet market but if the consumer experience shifts from the physical wallet, one might imagine that similar to a soft-sim might the wallet automatically pick a card based on best rates or rewards. Or perhaps even expand it’s functionality to pick off more of the services offered by a traditional financial services player.
Personal Finance Managers or PFMs
PFMs help people to better understand and track their finances. They enable users to aggregate all their account transactions and balances in one place, allowing for categorisation and the creation of spending goals to help with budgeting.
Mint.com, a US based startup, was one of the first, while more recently in the UK there are the likes of MoneyDashboard and OnTrees.
These businesses offer greater utility and functionality than a lot of the retail bank’s websites and mobile apps, and what’s more they allow a user to see all their balances and according total balance in one place.
As balance checking is one of the most frequent banking tasks across any channel, the fact that these services offer a single view might lead to higher levels of engagement and a reduced need for a user to visit their own bank. If the banks were to open APIs, as they’re encouraged to do so, and in particular transactional APIs one could imagine how other common banking activities like payments might shift to the PFM interface further reducing the need to visit a bank channel.
Social payments and international remittance
How many times have we found ourselves needing to repay a friend for restaurant, drink or perhaps holiday related bills? This has become a whole lot easier in the last couple of years with the arrival of a series of mobile apps that make paying a friend a whole lot easier.
US based Venmo is one of the leaders in this space and has been described as a cross between Facebook and PayPal. PayPal, while lacking the social activity feed aspect of Venmo, also boasts a similar pay a friend feature in their app. As does Jack Dorsey’s (co-founder of Twitter) Square Cash which is also powering the recent SnapCash feature in Snapchat (which also acts as a digital wallet).
While these entrants are well funded and seemingly growing fast, it’s only a matter of time before a much bigger player arrives too. Facebook having applied for an e-money license, and with payment related code spotted in its’ messenger app, seems poised to offer social payment features too. Might it also extend this to Whatsapp? Between these two messaging apps it has a global base of around 1bn which would make it a very serious player in the social payments and international remittance market.
Similar to social payment apps are the international money transfer businesses for example Azimo and Transferwise which allow people to send money to friends or families overseas. The latter is rumoured to have been recently valued at $1bn following its most recent fundraising round.
Like the PFMs that offer the ability to balance check and in doing so remove the need to visit a bank channel, might social payments also reduce the need to login into your bank by offering better integration with address books, a simpler experience and better transfer rates?
The market context for the banks is changing faster than it ever has done before. The advances in and commodification of technology have massively lowered the barrier to entry so in addition to those new entrants listed above a further slew will arrive very soon all of whom will be nimbler than the incumbents.
While innovation does seem to be high on the agenda for a lot of banks, many of them are also dealing with the distraction of branch closures and layoffs to reduce their cost:income ratio to protect margins for their traditional business model. On top of this they’re working around fragile mainframes, regulation and internal governance and legacy thinking that together inhibits agility.
Despite the lack of agility, banks have demonstrated that they can move fast when needed. The question is, in a world increasingly led by millennials and their behaviours, might the banks, whose average employee is of a different demographic, know which direction to move in, particularly if it involves not just a change of channel focus but potentially a change in business model?