Infostretch: Getting Ahead of the Three Most Disruptive Forces in Banking

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As the world emerges from pandemic isolation, 2020 is beginning to look more and more like a milestone year for financial services. While it’s still too early to assess the overall fallout from the COVID-19 pandemic, the crisis has already acted as a radical catalyst in the industry. The global fintech market is experiencing unprecedented rapid growth, primarily brought about by investment in game-changing technologies to help banks and firms adapt to the “new normal.” However, while the year has been great for innovators and fintechs, incumbent banks are starting to feel the pressure as once irrelevant competition has seen increased growth due to the digital acceleration that has taken place.

Herpreet Oberoi is Vice President of Customer Success at Infostretch, a Silicon Valley digital engineering professional services company. He has 20 years of industry experience in account expansion, business development, relationship building, customer management and IT program and project management. With his proven competency in financial services IT consulting, Oberoi has a deep domain understanding of banking, event notification, risk management applications and cross-functional systems. Here, Oberoi voices what he believes to be the three most disruptive forces in banking following the pandemic:

Herpreet Oberoi, Vice President of Customer Success at InfostretchHerpreet Oberoi, Vice President of Customer Success at Infostretch
Herpreet Oberoi, Vice President of Customer Success at Infostretch

When your financial services institution has millions of customers and billions in assets, it is easy to assume that there is safety in those numbers. But as we have seen only too clearly over the past year and a half, the world can turn on a dime and become a very different place very quickly.

In banking, there are major disruptions happening right now that will impact financial services institutions in fundamental ways – and not every organisation will make it through intact. The choices that financial institutions make now, and how seriously they take these threats and opportunities will determine their future health and even survival.

Open Banking changing the landscape

In Europe, Open Banking has been mandated through legislation known as PSD2, enacted in 2018. But what is it? At a simple level it means enabling APIs to share your financial data with the third-parties you want to share it with, in a compliant and standardised way.

But this is more than just one-off legislation, it is a global movement, with pushes towards Open Banking emerging in countries such as Australia, Japan, Singapore, Brazil, Saudi Arabia and Mexico, as well as the UK and the European Union. The exact flavour of Open Banking may be evolving differently in different countries, as may be the political will to enforce it, but the movement is gathering pace. And little wonder. From a political perspective, it looks like all upside and no downside. Customers can take control of their data, competition is stimulated, innovations and new services become possible.

In the US, there is no Open Banking legislation. However, industry and market forces are pushing the financial services market in the same direction. For example, NACHA, which operates the ACH payment processing network in the US, is pushing ahead with its Afinis Interoperability Standards to bring financial services API standardisation through voluntary membership. Meanwhile, US tech giants Apple, Google, Amazon, PayPal, Square, Stripe and Intuit formed an alliance called Financial Innovation Now which is pushing for policy changes, including the adoption of many Open Banking standards.

From a bottom-up perspective too, US consumers have been opened up to the type of benefits that would be possible through Open Banking, through the success of personal finance apps such as Intuit’s Mint, which aggregates personal financial information from 15,000 financial institutions. The service claims 20 million customers and achieves much of the promise of Open Banking.

There is data too which shows that many US consumers, and particularly younger demographics see the value in Open Banking. It is easy to see why. One of the defining characteristics of Generation Z consumers is their need for control over their own lives and identity – and accessing their own financial data wherever it may reside – is in tune with that need. In a major economy such as the United States, where Open Banking is attractive to the population, yet not mandated, the organisations which can give consumers what they want before others will no doubt leap ahead of the competition.

When we see an organisation like Visa buying Tink, a Swedish API fintech with just 400 employees for $2.15billion, you can be sure that the threat and opportunity that Open Banking represents is being taken seriously.

Digital banking killing old loyalties

According to analyst firm, Nielsen, fewer than half of US bank customers consider their bank to be their primary financial provider. Should this come as a surprise? Yes and no.

Physical branches are closing around the world while digital banking continues to rise. One study even suggests that at the current rate of branch closures, there may be no more physical bank branches by 2034. If traditional banks thought they could translate their existing power and customer base into this new paradigm, they were wrong. Trust in traditional banks is receding, neobanks (also called challenger banks) are mushrooming around the world and consumers are shopping around for their financial products.

And while ten or twenty years ago, savvy customers shopped around for better interest rates, a new generation of customers is looking for a better experience. They never want to call anyone about their bank account, they want zero paperwork, and they want their bank to connect to the right partners or other apps, to make their lives easier. They will probably never see your slick TV advertising that you spent millions on and they probably wouldn’t trust it even if they had. But they will trust the reviews in the app store when other users discuss how good, bad, stable or unstable your app is.

The covid-19 pandemic and resulting lockdowns globally levelled the playing field between traditional banks and neobanks. Without the ability to visit bank branches, all banks had to become digital-first. So, traditional banks had no other choice than to compete with “digital native” banks head-to-head by delivering the best digital app, site and service. For now, traditional banks that haven’t evolved sufficiently are like icebergs dropped into a desert. Their size and scale will protect them for a while, but in the searing heat, they won’t last long.

Technical infrastructure becoming a burden

There was a time when a bank’s large-scale mainframe infrastructure would have been considered an unassailable benefit – a reason why newer banks would never be able to compete. Times change. Now, that legacy infrastructure is an albatross around the necks of traditional banks. Many financial services companies still have monolithic architectures that, despite upgrades and rebuilds, don’t address the demands of data-driven real-time service delivery, that can be more easily achieved through the cloud.
On the other hand, the newest crop of digital natives can boast an ultra-flexible cloud-based core architecture. They are agile and they are fast. They can respond quickly to market dynamics, they can seize commercial opportunities and they can fend off rival banks. Neobanks’ rapid growth and modern infrastructure will in turn attract more technical talent, making them harder to catch, creating a technical virtuous circle.

If financial institutions fail to understand and address the scale of the disruptions outlined above now, if the issues raised above only remain as slides in PowerPoint decks for the next two years, then there is little hope for those banks’ long-term survival.

And yet, with everything outlined above, hope remains. The truth is that many banks are already awake to the threats and are taking – or have already taken – positive steps to address them. Even the banks that wake up now to the tectonic shifts still have time to address them, so long as they don’t delay and partner well.

https://thefintechtimes.com/infostretch-getting-ahead-of-the-three-most-disruptive-forces-in-banking/