What tools do banks have to face the pressure from tech giants, central banks and decentralized solutions? What is next for them? Let’s have a closer look:
In our previous post, we discussed three major threats that banks feel behind their necks. All these challenges have the potential to eliminate the ‘need’ for banks - namely being a trusted intermediary between two parties.
Do banks just sit idle? Surely not. Let’s have a closer look on what they do and what the future looks like for them:
What do banks do?
Banks are well aware of their own shortcomings and have been looking for potential solutions for a long time. However there are certain internal structural challenges that they need to tackle:
First of all, banks developed their own infrastructure during 70’s or 80’s (or even 90’s in some emerging markets). These legacy systems are clearly outdated and it is painstakingly slow to migrate into newer technologies. In order to address changing customer needs without changing their internal systems, banks has turned to startups for help. So a new sector was born: FinTech.
|Image by Schluesseldienst from Pixabay|
Banks have heavily invested FinTech: They made partnerships with several startups, use their services as part of their core offerings. In some cases they bought these startups and brought their team in-house. Jury is still out on the effectiveness of such strategies:
On the one hand these startups brought a fresh air to the plazas that banks reside in. On the other hand - perhaps inevitably - we have seen cultural clashes between new kids on the block and the old guard. Who is the winner? In most (almost all cases), the old guard - resulting in startup employees leaving their new masters to pursue other opportunities in outside world.
However, there is a deeper issue here: Fintech will help banks adapt to new technologies, but not change how they structurally do things.
The market is changing and banks are losing their touch with their customers
In our previous post, we mentioned three main threats to banks as individuals, central banks and tech giants.
Thanks to emerging technologies, all three have the power to challenge banks: Individuals, through the use of decentralized solutions such as cryptocurrencies and DeFi. Centrals banks by issuing Central Banks Digital Currencies (CBDC’s). Lastly, tech giants - already having been inside the pockets of customers through mobile phones - using digital currencies to cut the cord between the bank and customer.
|Image by Schluesseldienst from Pixabay|
Pattern is clear here. Banks are moving away from their customers. Their core function as the middleman between transactions is no longer needed. Individuals can use currencies or tech giants for their financial activities and central banks can directly interact with their citizens.
So what is next for banks?
Is it all doom and gloom for banks? Not necessarily. Here is a hypothesis that will be tested over the next decade:
While banks keep hold of most of their customer base, they may lose the lion’s share. Customers may prefer the comfort of using other apps on their phones for their financial needs. Besides, these alternatives will be much cheaper. Why? Well, apps do not employ thousands of people, and do not occupy skyscrapers, so they are coming from a much lower cost base.
The alternatives, like Facebook/PayPal or DeFi, may still need banks for certain transactions. As a result, they will make wholesale agreements with banks, to leverage banks’ regulatory status and operational power.
In essence, banks will become the subcontractor for others. This will result in growing transaction volumes but with much lower margins.
Banks in turn will desperately try to slash their costs. Send most employees to their homes - a trend already gained popularity thanks to pandemic - and heavily use technology to replace human power. No more offices in high rise buildings, expensive dinners, retreats in resorts or company drivers. All will be gone.
Banks will continue to be a major part of our financial activity. However, gone are the days where they have exponential growth with high margins. Cost improvement will be the name of the game:
Smaller players will either transform into full online players or be acquired by others. Larger players will see their revenues grow however have hard time keeping sustainable profitability.
Just like the internet has transformed the media, this new revolution will have a transformative effect on banks. Are you ready?
None of the views expressed in this article should be considered as investment advice