In an article published by Reuters in November 2017, the Bank of England stated that banks may be underestimating the fintech threat. Today, fintech firms and alternative providers are encroaching into every function of the bank. These new kids on the block specialise in specific processes or use cases and are leveraging banks as a channel to grow their businesses. Given this environment, banks are now assessing and responding to the growing threat from these Fintechs and start-ups.
Let’s question if there is a real threat to the bank’s business, and if yes, then who are these players. In the past we have seen huge investments in e-commerce resulting in multi-fold expansion and growth, but the results were not commensurate. However, it is a known fact that the markets today are very different than those from the dotcom era as most of the end consumers are millennials and are digital savvy. Millennial customers spend significant time on social channels (such as Facebook, Twitter, Instagram, and WhatsApp) and their buying habits are influenced by reviews or feedback from their peer group and other customers. E-Commerce giants such as Amazon and Alibaba have significant insights into customer behaviour through deployed tools that track buying patterns, which also help in cross-sell and up-sell strategies. With an excellent understanding of customer behaviour and associated risks, these e-businesses are in a position to disrupt the financial services business model.
Industry Use Case
Let’s take an example of a personal loan. A lender needs to evaluate not only a borrower’s ability to pay, but also his intent to pay, an evaluation which translates into better credit risk scoring. Typically, banks rely on credit risk scores from rating agencies, which typically look at transactions of customers (incoming and outgoing). This approach has been quite predictable and is acceptable in the industry. However, this model can only predict one attribute, which is the ability to pay but not the ‘intent to pay’. With advancements in data sciences, contemporary methods of credit risk scoring are being developed that focus on both aspects by carefully analysing a customer’s behaviour and transactions. With the above example, it is apparent that new e-commerce businesses are in a solid position to offer lending on the go to their customers. We see this through Alibaba which set up WeBank in China and entered the banking space. It is understood from various reports that WeBank’s NPAs are way below the industry average, proving that non-banking players are riding on the power of data to securely offer financial products to their customers.
The Way Forward
The saying that “banking is important, but not the banks” may soon become a reality. Now, do banks have any real choice? Should they wait or do something to prevent their business erosion? Banks have 3-ways to address the situation:
- Rely on government policies to stop non-banking players entering their space.
- Acquire and / or find ways to stall these non-banking players.
- Focus on customer experience and develop propositions that integrate with the digital lifestyle of customers.
Banks cannot rely on option one and place big bets at the cost of their business. Choking players to survive is also not a long-term option. So, the only viable approach for banks is to shift focus on customer centricity by embracing their customers’ digital lifestyle. We see today that the customer is truly the king and decides where and with whom to do business. They can change their association on the fly based on their interests at any given point in time.
On an immediate basis, banks have to revisit their customer journey and interaction points. The focus should be on enabling frictionless customer experience and simplifying customer transactions, thereby delivering value and a feeling of care. As an example, banks today are at the center of the car-buying experience. They can ensure they have a greater say on the buying process by proactively going out and farming right partnerships in order to orchestrate the best customer experience. This would project to customers that banks have started paying attention to their needs and are working to create better opportunities for enhancing customer-to-bank relationship.
While the above will reduce friction to some extent, banks still need to find the ways and means to be part of the complete digital lifestyle of the customer from dawn till dusk. This requires banks to seriously think out of the box and learn from non-banking players the new ways to embed themselves around the customer lifestyle. Very recently, Chase took a great step towards launching Finn Bank (exclusively branded) to captures customer feedback on their spends, which also becomes an inputs for merchants to differentiate. It’s a strategic step in the right direction!