Until recently, fintech startups have posed the biggest threat to banks, steadily weakening the loyalty of long-standing customers with more personalized, transparent offers and sleek, engaging UX. Still, many banks view these fintech rivals as small fry players without the means to capture enough market share to truly derail them. But with the arrival of tech giants to financial services, a new, more powerful threat looms for banks. As tech giants like Amazon, Facebook and WeChat set out on their quest to be all things to all people, eroding the boundaries between industries, banks that want to maintain and grow their market share need to rethink the rules of competition.
In a recent Quartz article, McKinsey & Company aptly described the main risks facing banks in this new, more diverse playing field as “the four horsemen of the e-pocalypse”: disintermediation, invisibility, unbundling and commoditization. While times are certainly changing, banks need to face their new competitive reality head on and leverage the growing diversity of their ecosystem to spur innovation through open collaboration.
Forward-looking banks that are able to see this vision for the future will be able to turn these “four horsemen” into compelling opportunities for growth:
Disintermediation: Banks are losing access to customers as they switch to non-banking channels and sources.
While the proliferation of new banking options provided by fintech and non-bank players like Apple, Facebook and Amazon naturally puts banks at risk of losing market share, it also opens up new opportunities for partnership. Take, for example, Amazon’s foray into small business lendingand the new healthcare company it set up with Berkshire Hathaway and JPMorgan. Both moves were made in partnership with banks that were able to lend their financial and risk management expertise to Amazon while creating new value for their own businesses. While partnerships with tech and fintech firms certainly add new complexity to competition, they also open up new potential revenue streams that should not be overlooked.
Invisibility: Banks are losing brand awareness and becoming invisible as consumers can access financial services without knowing the brand.
While a growing number of banks have acquired fintechs to avoid fading into the background (CB Insights reported that 2017 saw more acquisitions by top U.S. banks than any other year), what banks need to realize is that ownership over a product, service or customer relationship is not a prerequisite for commercial success. The rollout of open banking in Europe and growing support in other regions (Accenture found that 63% of North American banks believe that embracing open banking will help them compete with new entrants) demonstrates that traditional players are coming around to new models of operation that might not see them as front and center of the customer relationship.
Unbundling: Banking products and services are being unbundled, as consumers can choose from single service providers.
Although the proliferation of financial apps, products and services has moved some banks one degree of separation away from end users, banks that embrace open API banking and the sharing of customer data with third parties actually stand to deepen their customer relationships. By enabling richer, more personalized banking experiences and offering seamless access to third-party, value-add products through a single interface, banks can become the hub of their customers’ financial lives rather than just one aspect of it.
Commoditization: Banks are struggling to differentiate themselves as consumers compare banking products online with greater transparency.
The depth of customer data banks have at their disposal is one of their most precious yet underutilized assets. Banks adept at extracting customer insights from this data to develop personalized offers with the help of AI, deep learning and location-based services will be able to avoid commoditization by focusing on customer-centric innovation that closely meets the needs and circumstances of each individual.
In this strange new financial world, the biggest risk facing banks is that of inaction. While banks remain the leading experts in the world of risk management and regulatory compliance, they shouldn’t underestimate the advantage that their tech and fintech counterparts have in knowing how to delight the customer. Instead of shutting out these new entrants, banks need to focus on creating an open banking economy that will enable them to expand their reach, deepen customer relationships and more quickly benefit from the innovation taking place around them.
Author: Martin Häring
Chief Marketing Officer
Published on Forbes