The Future of Banking with the Growth of Technology
Like businesses everywhere, banks need to continue embracing emerging technologies while adapting and evolving business models to put customers at the forefront of their strategies. From online check deposits to money transfers and everything in between, banks must keep up with the times to keep their customers happy and loyal to their brand. After all, banking years from now will look different than it does today.
Banks will continuously face changing consumer expectations, innovative technologies, and new business models, all of which will result in better strategies to prepare for banking in ten years. Here's what the future of banking holds as technology continues to evolve.
Banks vs. Fintech
Fintech (financial technology) uses technology like artificial intelligence and mobile app development, along with innovation, to compete with traditional banking methods when it comes to providing financial services like checking accounts. Fintech companies are continuing to take market share from traditional banks and financial service providers.
Examples of Fintech include:
Digital payments between people
Online stock investments
Banks are currently facing competition with fintech in the following areas:
Digital deposits through mobile banking apps mean that banks no longer need to rely on local branches to accumulate deposits from customers. This levels the playing field so that many different types of organizations can compete for deposits. Digital banks have offered accounts that attract consumers with high yields and convenience.
Without the need for branch locations, companies like American Express, Synchrony Financial, and Discover Financial have been able to increase deposits with digital banking services so that they can offer higher rates than their competitors. This increase in deposits makes them a threat to traditional ways of gathering deposits.
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In response, many banks have responded by offering their own digital platforms for their customers in the hopes of retaining them. This is a necessary step that all banks must provide. Digital deposits not only allow convenience for your customers but can protect your market share.
Consumers initiate payments with bank-issued credit and debit cards to send funds through open-loop networks, including Visa, or closed-loop networks like American Express. Banks collect fees from merchants who accept credit cards every time consumers use the cards they issue.
Consumer electronic payments will likely continue to flow in this same way through the existing networks. Fintech advancements like mobile card readers and contactless cards are making payments via bank cards rather than trying to replace them altogether.
Still, there are new Fintech companies every year that want to disrupt this old system, and you can expect significant changes within the next ten to twenty years. Take PayPal, for instance. They've not only developed a market position with consumers, but they have established one with merchants who accept PayPal payments as well.
This system still relies on the card networks and banks, but it could eventually diminish the fees that banks can charge on a card transaction. Not to mention, PayPal's person-to-person (P2P) payment solutions like Venmo forced banks to launch their own version called Zelle.
You can expect other large tech companies like Google, Facebook, Amazon, and other major brands to continue to copy the success of online payment services and launch more digital banking solutions like digital wallets. With Apple facilitating card payments, banks are experiencing pressure.
Fintech companies have been stepping into the areas where traditional banks have moved away from because they don't have the processes in place or the ability to scale to meet the demands of consumers.
These companies are able to offer consumers a better experience and lower prices because of the lack of necessary branches. Digital lenders will continue to see growth over the next ten years and beyond. However, there are still systems in place that can't allow fintech to completely take over. Areas like the mortgage industry, for one, will still largely depend on traditional banks and lenders.
Banks' Responses to Fintech
Banks will have a difficult time responding to all of the diverse fintech companies and their services. Many banks will need to increase their spending and usage of technology to combine in-branch teams with fintechs or purchase these fintech organizations outright.
Here's how banks have responded so far to fintech and how we expect them to continue to respond over the next ten years.
Increasing Technology Spend
Total spending on technology in the banking industry has increased in recent years, and we can only expect it to increase as the threat of fintech looms. With a higher revenue, larger banks will have an advantage over regional banks because they're able to spend more on technology.
An example of where banks have been successful when it comes to increasing technology spend is mobile banking apps that provide convenience to consumers. Some have even rolled out small business and personal loan platforms to make the process much simpler for people who need a loan.
Partnering with Fintech
To beat your competition, sometimes you have to join your competition. Many banks have started partnering with fintech companies, which has enabled them to grow their revenue in areas that banks lack expertise and scale. Fintechs can benefit from this partnership because it will diminish their customer acquisition costs and monetize their innovations in the financial sector. Fintechs will also gain access to stable funding and can use the bank's network to grow their own customer base.
On the flip side, partnering with a fintech company could confuse the specific duties between fintech and the bank. Banks could be sent to be a back-end processor while the front-end business is taken away from them. A bank could also potentially lose direct contact with the consumers it serves, along with the personal data they need.
Tech companies in the banking space will be the biggest threat to traditional banking. With Apple, Google, and Facebook entering the payments space and Amazon offering working capital loans to merchants on its platform, we can expect to see more threats come out of the woodworks.
Tech titans like those we've just mentioned have reach and visibility far beyond those of most banks. Banks could face a competitive threat. For right now, we don't believe these giants have any plans to fully enter the banking space.
Technology will remain at the forefront of banking in the future, so it's important for banks to adapt to the fast changes.