A view of the banking industry’s future, featuring Tom Blomfield, CEO of Monzo, and Sergio Ermotti, CEO of UBS.
This article was produced by (E) BrandConnect, a commercial division of The Economist Group.
Banks have been facing a crisis of confidence since the financial and economic crash of 2008, says KPMG’s Peter Rothwell. New technology and changing customer demands mean that, by 2030, that crisis could become existential. Will we need banks in the future—or just their services?
“As recently as the early 2000s, you would go to a retail bank and they would try to cross-sell you all of their different products, and many of those were not price competitive,” says Tom Blomfield, cofounder and CEO of digital bank Monzo, founded in 2015. “And so, over the past ten or 15 years, we've seen a wave of disaggregation—new fintech competitors providing point solutions, single products with great customer service and pricing.”
Fintech companies, which use data-driven technology to automate many of the financial services traditionally provided by banks, have been the big disrupters of banking over the past decade or so, offering faster, easier-to-use and cheaper products to personal and corporate customers. Many, like Monzo, are UK-based, including TransferWise, which has reduced the cost of cross-border transfers, and Nutmeg, which uses data to help customers manage investments. UK fintech startups attracted $20.7 billion in funding in 2018, trailing fintech investment in the US ($52.5 billion) but coming in ahead of China ($18.2 billion).
By 2030, however, Mr Blomfield foresees a shift back towards reaggregation in the sector. “Instead of having to maintain 15 or 20 different apps or logins, you’ll have a single aggregating financial app that then pulls in all of these different products and services under third-party brands,” he says. Monzo already has a number of partnerships with other providers in place, including TransferWise for foreign-exchange products and fintech startup OakNorth for savings vehicles, and has entered into an agreement with Ohio-based Sutton bank to give it access to the US market.
And, he believes, the sector will ultimately be split into two: “On the one hand, there will be banks with very, very large balance sheets, but with almost no brand, no physical presence—like big oil tankers providing money,” he says. “And on the other, platforms that are focused on the functionality that customers want.”
Automation is the force underlying these changes in the sector. Younger customers now demand that banks, like other industries, are digitally driven and able to offer services instantaneously, at good value for money and from a smartphone.
“Client expectations will keep increasing,” says Sergio P Ermotti, group CEO of Union Bank of Switzerland (UBS). “Younger generations will expect new products, better services and faster delivery—preferably at a lower cost.”
And this, he argues, is what the continuing digitalisation of bank services will achieve.
“Computing capabilities and digital technologies, such as advanced analytics, machine learning and the cloud, will transform the nature of services and delivery channels in banking,” he says.
However, not all services will be provided digitally. Mr Ermotti argues for the development of banking based on “high tech with a human touch”.
“Customers will still need banking products and services, especially when it comes to more complex and very personal things like old-age planning,” he says. “But simpler services such as payments, savings, investing and lending will be heavily shaped through technology.”
And that technology may ultimately do a lot of proactive banking for us.
“We will see fully digital services, with a 24/7, end-to-end client journey,” he says. “There will be hyper-personalised products, which means the end of standardisation as we know it today. And it’s only a matter of time until there are autonomous services and product offerings that detect clients’ needs in a completely automatic way and approach clients at the perfect time in exactly the way clients like it.”
Peter Rothwell, a partner at KPMG in London, agrees, but sounds a warning note.
“We have had some basic automated services for some time,” he says, “such as money swept automatically from customers’ savings accounts to their current accounts to avoid them going into overdraft. And those services will increase. But we still need to ask, can we trust the banks to manage our data well and can we trust the technology to make the right decisions? Banks have been striving to regain the trust they lost in 2008, and the threat they face now is how to allay concerns about how they might safely store and use our data. They will need to evolve and reassure us on a trust level to survive.”
This new banking world will require big changes from existing banks, which, Mr Blomfield argues, are burdened by expensive legacy systems and high headcounts. He doesn’t see established banks failing in the short term—“They are too rich for that,” he says—but they will have to improve their game.
“The problem with big banks is that they are not good at customer service and their overheads are way too high to be really price competitive,” he says. “If you look at the savings rates that the big banks are paying today, they're between 0.2 percent and 0.3 percent. If you go to a lot of the newer banks, they're offering between about 1.1 percent and 1.4 percent interest on easy access - three or four times better prices.”
To survive, he argues, existing banks will need to invest in disrupting themselves.
“What they need to do is launch their own challenger brand, put in $100 million, $200 million and a small team of experts and send them away to build the thing that is going to kill them,” he says.
Mr Ermotti is, understandably, less dramatic about the cure, but he agrees with the need for more innovative thinking in banks.
“We will need to foster a more ‘intrapreneurial’ spirit,” he says, “with new ways of working, flat hierarchies and opportunities to move around internally.”
Rather than cannibalising business from within, however, he argues that existing banks would benefit from forging partnerships with fintech companies. UBS is already working with US startup Broadridge, for example, to build a platform for back-office services.
While agreeing that partnerships between fintechs and incumbents will be important, Mr Rothwell warns that banks should be careful not to absorb those new players into their existing branding.
“You have to preserve the newness, the difference that a startup brings—hence Bó rather than RBS or NatWest for the recently launched digital bank.”
The next ten years won’t be plain sailing for banking startups either, he says. Their challenge will be how to both maintain the differential that first attracted customers and avoid reverting to established ways of doing business once they hit a certain size.
“For startups, the key to success is understanding why they’re different,” says Mr Rothwell. “Once you get beyond a certain critical mass, you tend to start to revert to the standard pro forma for that particular industry. You can be really nimble and agile as a startup. But, once you get to a certain level of deposits or presence, the regulatory environment changes. You lose some of that flexibility and innovation and agility, the things that made you attractive in the first place.”
In the next ten years, he says, banks of all sizes will have to accept that usability, reliability, trust and customer service will be the key differentiators in the sector. Trustworthiness may be harder to earn in a world of apps and platforms devoid of imposing high-street buildings and centuries-old brands, but a new generation of users will expect to see a greater transparency and commitment to cyber security than many banks demonstrate at the moment.
And—something that will come as a relief to those currently disgruntled by the high prices and less-than-sterling products that some banks still offer—good customer experience will be a must.
“To survive, banks will need to deliver services at a very high standard,” says Mr Rothwell. “As many startups find, and established banks already know, acquiring customers is easy. Retaining them is hard.”
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