Bank of the future: without offices, employees, and customers?
Competition for clients in the banking industry is intensifying. That’s partly because technology companies have recently been increasingly claiming a significant share of this market. Banks cannot win this race without reviewing the existing business models. In particular, the process of their transformation can be greatly facilitated by cooperation with fintech startups.
The most radical forecasts predict that banks will remain not only without offices, but also without employees, and even without customers.
There is no shortage of forecasts about the future of banks as classical financial institutions today. There is also no doubt that the traditional business models of banks will undergo major changes under the influence of new technologies and customer requests. Only assumptions about the degree of depth and speed of these changes vary. The most radical forecasts predict that banks will remain not only without offices (having completely switched to a digital format), but also without employees (they will be replaced by artificial intelligence), and even without customers (interaction will take place not with people, but with the Internet of things). On the one hand, such assumptions do not seem to be completely fantastic. For example, until recently, remote customer service, including the service for legal entities, was offered only by a limited number of banks. Today, without this technology, it is no longer possible to imagine the full functionality of a credit institution. From managing your accounts to working on a salary project, all this has become available in banks’ personal accounts.
As for banking networks, for example, according to PwC estimates, every third bank branch in the United States will close in the next decade, and even every second bank branch will close in the Scandinavian countries. The Bank of Russia has estimated that the number of bank branches in Russia will decrease by 40-50% by 2025. Thanks to the development of user authentication systems, including biometric ones, it won’t be necessary to visit bank branches so often: even the most important documents one will be able to sign digitally.
The current global trend towards the reduction of banks’ physical offices will not lead to their complete disappearance. The human factor will remain important – even the most efficient robots and chatbots can’t displace live communication. This is especially true when one consults clients on complex structural products, when individuals and entrepreneurs may have additional questions that are not taken into account by the program script. In addition, for VIP clients, visits to specialized bank branches are often part of their lifestyle. Finally, in case of transactions with large amounts of cash, it is more convenient to carry out them at the bank’s cash desk than, for example, through an ATM. At the same time, the internal functionality of bank branches will definitely change. In particular, in Russia they can be re-equipped in light of the development of new technologies in the field of biometrics and customer identification. Especially against the background of recent trends in promoting the Unified Identification and Authentication System (ESIA) and the Unified Biometric System (EBS) in the country.
In general, the traditional banking business is already under serious pressure not from banking and even not from financial, but technological companies. According to McKinsey estimates, by 2025, banks may lose from 10% to 60% of their retail business profits due to increased competition with tech companies. For example, according to Reuters estimates, the Chinese P2P lending market could grow to $225 billion by the end of 2018. Foundation Capital forecasts that the global P2P lending market will reach $1 trillion by 2025. The consulting company Accenture warned that by 2020, such financial services will “take over” up to a third of the banking sector’s revenues. How will domestic banks be able to compete with technology companies? For example, by offering a client comprehensive services and creating an entire infrastructure of non-financial products and services around them, including, for instance, marketplaces. For example, why does a client apply to a bank for a loan? – To meet their needs. From making any purchases to paying for medical or educational services. But the client is less interested in the traditional financial solution (pure money) than in the possibility of getting a comprehensive service. Therefore, banks need to move towards providing not a separate service, but a turnkey solution at the customer’s request. That is, in addition to financing the client’s needs, they should help him with the choice of service providers. Such a scenario in pursuit of customers is no longer a fantasy today. The entrepreneur is interested in the products that would help him run his business more efficiently without logging out of his online banking account. This also applies to working with clients of small and medium-sized businesses, which I focus on in my professional activities. In recent years, we have noticed a transformation in the expectations of such clients. For example, entrepreneurs are showing increased interest in non-financial services and are expressing a need for them. Among such non-financial services are accounting and tax accounting, analytics, as well as legal support for transactions. The growing transformation of the banking industry requires new approaches to products and services. In such conditions, own R&D capacities are no longer sufficient to retain one’s place in the competitive race – new concepts must be found in external sources. Thus, the practice of foreign banks involves either direct investments in startups with high potential, or the purchase of innovative companies.
This strategy is also facilitated by the highly developed startup infrastructure of Western countries, such as the United States or the United Kingdom. For example, unlike the Russian market, Western fintech startups have several options for company development, including selling for a premium price. Such opportunities are very limited in Russian practice – examples of successful project sales are the exception rather than the rule. Therefore, the strategy of Russian innovation teams is more focused on developing their own product for the long term. In this scenario, accelerators, which organize interaction between fintech startups and financial institutions, become particularly relevant in domestic practice. Thus, we are participating in the Banktech 2018 interbank accelerator, which is organized by Fintech Lab, in order to find projects that will help us address the current needs of the bank’s customers, saving time and resources. KPMG estimates that global investments in fintech reached $31 billion in 2017 (compared to $24.7 billion in 2016). As for the Russian market, estimates of its size vary quite a lot (the range is from 20 million to 50 million dollars). Of course, these volumes are still lagging behind the global trend, but nevertheless, Deloitte Digital experts have already included Russia in the top five digital banking countries in the EMEA region (Europe, Middle East and Africa) this year. This suggests that a solid foundation has already been laid in Russia for future changes in the banking business.
Read more on the website Bankir.ru