Much has been written about digital banks and how they intend to transform banking. It is has been said that starting with current accounts for millennials, digital banks will slowly move up the value chain with cross-sell and other services.
Yet, if one looks at the crop of new banks launched in the UK and US, none really have made much impact. Despite lofty valuations and a lot of attention, the size of most is small and the share of customers treating them as their main bank even smaller. Revenue streams are largely linked to debit card spends, though many are now diversifying into fee-based accounts and trading platforms to boost income.
And with COVID-19, the road ahead has become even more daunting. Most incumbent banks have invested in their digital offering, thus significantly narrowing the gap. With customers trusting established names in times of adversity, the position of digital banks has become more tenuous.
Indeed, some have suffered “down-rounds”, with additional money raised at lower valuations. And some have closed shop. Yet, many have been able to build value by packaging their offering into ‘banking as a service’ platform for retailers wishing to enter banking, or traditional banks wishing to jumpstart their digital offering. And, this collaboration model may be the way forward.
A silver lining has been the response from the SME sector. As incumbent banks struggle with these clients, with management often shifting between retail and corporate divisions, SME-focussed digital banks have hit a sweet spot with their openness to assess non-standard applications.
Work in progress
While the UAE does not have a standalone digital bank yet, incumbents have either improved their digital offerings or launched new brands. Even though they were the first ones off the block, Commercial Bank of Dubai decided to drop the ‘Now’ Brand and merge the capability into the mother company. Others like Emirates NBD continue to support separate propositions like Liv.
While there will eventually be a standalone digital bank, success is likely to be difficult in the absence of real technology differentiators or a captive customer base. So, who can disrupt the banks?
A ‘bigtech’ moment?
With their huge base and intuitive customer experience, bigtech companies like Amazon and Facebook are the ones to look out for. Customers are accustomed to their user experience, and most likely will use financial products from them as a seamless extension of their regular interaction. With so many customers - Facebook has 2.5 billion users - these companies can create their own ecosystems.
With regulators pushing for open banking, entry of BigTech into financial services is a possibility. (Though, ironically, regulation may also be the reason why bigtech may not enter banking as their models would be subject to higher scrutiny.)
Yet, with the large size of the banking revenue pool, entry into financial services may be too big an opportunity to miss. Facebook has already made a bold move with Libra crypto currency and can be expected to leverage investments in A.I. to target banking.
They were the original challengers who transformed financial services in parts of Africa, but their success in the more established markets has been limited. Yet, with their massive reach, especially in under-banked segments, telcos have scope as movers of money and facilitators of commerce. Regional examples include STC Pay and Etisalat eWallet.
What can banks do?
Banks have to evaluate their user experience vis-à-vis the FANGs (Facebook, Apple, Netflix and Google). This requires an overhaul of not only customer onboarding, but also the enshrined silos of product development, credit policy and credit initiation.
It means a complete reimagining of product development and credit assessment processes. Today’s product and credit teams follow the traditional approach with detailed product programmes, credit policies and application forms, and with anything not falling within the criteria not accepted.
Customers have to thus adjust requirements to accept amounts, tenors and repayment mechanisms.
Whilst this is very efficient, the need is for - to quote Reed Hastings of Netflix - is ‘Flexibility over efficiency’. Adapted to banking, it means replacing structured products and policies with 1:1 solutions tailored to the life-cycle of the customer and delivered on a proactive basis rather than on a reactive ‘apply-now’ basis. This would mean real-time deployment of AI and machine learning to enable offers based on the current needs of the customer with an ability to agree on terms unique to the customer rather than defined by a fixed product sheet.
With the advent of 5G, Internet-of-Things will come of age and interaction with connected devices no longer restricted to smartphones. While services provided by banks will always be required, the provider and mode of delivery is ripe for change - and may look entirely different in the near future.
- Bobby Kakar is a banker with a preference for technology.