Can Banks Stand Up to the Threat of Big Tech Incursions into Finance?
Gone are the days when banks could take customer loyalty for granted. With many non-traditional players increasingly foraying into areas that have traditionally been the banks’ domain-payments, transfers, lending, investments, etc.-traditional banks are facing a real threat to their revenue streams from fintech start-ups as well as tech giants like Amazon, Google, Tencent.
Centered on digital platforms and offering a great bundle of services along with next-level customer support and care, big tech companies are increasingly encroaching into the bank’s turf and embedding themselves into the daily lives of their customers. They are making available a host of digital payment options like digital wallets and even physical payment modes like co-branded cards. The covid-19 pandemic, which saw e-commerce hit the roof, has also supercharged digital payments platforms as more and more people turn to them to fulfill their day-to-day financial needs. Such offerings from big techs threaten traditional banks, who may see themselves getting sidelined and even become invisible to consumers.
Non-traditional players –
why they pose a threat?
There are reasons why banks have much to worry about.
First of all, these tech companies are already established brands that have a massive user base and enjoy the consumer’s trust. So when they launch a new product, say a new digital payment platform or an app, it already piggybacks on the company’s formidable reputation and people are more than willing to try it out.
Second, although most payment and transaction options provided by big techs are channeled through banks, these companies end up disintermediating banks from their customers-banks tend to take the backseat and perform the regulated activities while these companies retain the customer relationship. Customers can access financial services without even knowing which bank is providing the back-end infrastructure. Banks end up becoming the “dumb pipes” of the financial services sector.
Third, being technology companies, they have a history of innovation and the capability to build sophisticated, user-friendly interfaces that their customers love. They provide incomparable convenience in the form of mobile wallets and other products to help customers make payments in a hassle-free manner; even credit cards are bypassed. No prior relationship with the customer is needed. New users are acquired at the POS, with all necessary checks taking place in a matter of seconds. This level of convenience makes them hugely popular with today’s digital natives. Banks are falling behind the tech curve when it comes to offering this level of convenience and losing customers as a result. They remain hamstrung by regulatory rules as well as legacy networks which make full-scale digital transformation a painstaking and expensive affair.
Fourth, big techs continuously use vast troves of gathered data-from social media, from transactions, from received messages – to get a 360-degree view of their customers. They analyze this data to accurately predict risks posed by loan applicants as well as curate products for customers based on their past behavior. Traditional banks, despite having access to high volumes of customer data, are not proactive in analyzing it to see how they can improve their customer’s lives by offering more useful products and services.
A few examples of big tech forays into finance.
Consider Amazon. It is quickly building financial services products like Amazon Lending, Amazon Cash, or Amazon Pay, that support its core strategic goal – increasing participation in the Amazon ecosystem. Merchants on its e-commerce platform can borrow small amounts in a hassle-free way, customers can put money into their Amazon Wallets and shop online without a credit card, and can even shop on other sites using Amazon Pay without reloading their credit card information.
Google has developed a digital wallet platform and online payment system – Google Pay – that allows customers to make in-app, online, and in-person purchases and make payments by tapping on Android devices. Uber is also moving into finance with a division called Uber Money that comes with a digital wallet and upgraded payment cards. Facebook and Instagram allow shoppers on their platforms to purchase products and use Facebook Pay to make payments.
And then we have sophisticated super apps like China-based Tencent’s WeChat and Alibaba, Indonesia-based Go Jek, Singapore-based Grab, and so on that offer a wide range of products and services, and bundle together online messaging, social media, and marketplaces to help customers fulfill all their needs from ordering food to hailing a cab or booking tickets and pay from a single app.
Where does this leave banks?
Banks today recognize that in the age of blurring boundaries, everyone can be a potential competitor – whether it is big tech, big retail, or fintech start-ups. For banks to retain their customers, the mantra is simple – they need to reinvent their business model around making their customers’ lives simpler and helping them at each step of their journey through real-time support, deep personalization, and a focus on customer satisfaction. To survive and prevent big techs from prying on their customers, banks need to find a way to connect more closely with customers and provide frictionless, intuitive, and even enjoyable experiences for them through seamless user interfaces. They need to ramp up investments in digital platforms to ensure great customer experiences and keep costs down.
How can they counter the threat?
No matter how big the reach of tech giants, banks will always enjoy unmatched trust from customers. For centuries, banks have been the trusted guardians for handling people’s primary financial needs and that is not likely to change any time soon. People still trust banks the most when it comes to their finances or personal data. What banks need to do is to build on their core competency and offer new services that are outside their general bounds of expertise and also provide stellar customer support.
Forward-thinking banks have realized that they need to keep their customers at the front and center of their business strategy. They are working to build new capabilities through partnerships and also ramping up investments in digital platforms.
Leading banks are expanding their offerings well beyond financial services to address a broader set of customer needs, be it hailing a cab or booking flight tickets. For this, banks with a narrow product set are working with external partners to offer more products and services within integrated digital financial platforms like apps. They are investing in seamless digital tools to integrate with non-banking apps (travel, retail, food & beverage, healthcare, etc.) that will help them gain access to more customers and reduce customer acquisition costs. The bank’s app serves as the entry point through which customers can go on to select what service they are looking for. By bundling their products in this way, banks can make the big tech’s unique value proposition look a little less unique.
A few examples.
Russia-based Tinkoff has built a super app that gives customers access to a variety of financial and lifestyle services. Russia’s largest bank Sberbank has spent around $3 billion, or 3 percent of its capital, on expanding into non-core businesses ranging from cyber security to online cinema and food delivery.
OTP Bank in Hungary allows their customers to buy train tickets. Spain’s leading bank Caixabank is transforming imagin – so far a mobile-only bank for young people – into a lifestyle-oriented digital platform where customers do not need to open a formal account with the platform but can simply download the app and sign up using their email addresses. They can look up both financial as well as non-finance related products on the app.
Most customers today prefer to communicate digitally. This trend has accelerated post-covid, with major shifts being seen toward e-commerce, digital payments, instant payments, and so on. Also, customers prefer to message businesses for queries — whether it be regarding opening a bank account, inquiring about a loan, or simply asking directions to the nearest ATM — and expect quick, real-time answers.
Banks understand that to engage customers and help them, they need to have a digital presence across all channels their customers use for messaging, and provide them with a seamless experience even when they switch channels. They should aim to push information directly to customers via the latter’s preferred channel. They need to leverage platforms like Push, WhatsApp, Apple Business Chat, Messenger, emails, and SMS for 24×7 customer care and support. By offering their services on digital platforms also used by tech companies, banks can significantly enhance customer experience and reduce churn. By continuously listening to, communicating with and learning from customers, banks can actually understand what’s important to their customers and serve them accordingly.
- Roll out digital end-to-end account opening
- Send alerts and reminders (WhatsApp only)
- Offer real-time support – locating nearest ATM branches, etc.
- Order new debit and credit cards
- Answer queries on interest rates, account balance
- Sell products and services over a secure channel that is private, scalable, GDPR compliant
- Check credit scores, account statements, loan eligibility
- Target customers with relevant information, advertisements and content
For banks, it’s a catch-22 situation. If they do not partner with big techs to handle the actual banking part, they risk losing out on a major revenue stream, but when they do, they are relegated to the backseat and lose their customer relationships. Forward-thinking banks should focus on improving the situation by partnering with tech companies, but do it in a way that does not undermine their relationships with customers. They should provide the primary customer interface, the entry point through which customers can seamlessly access third-party, value-add products offered by big techs. That way banks will not be rendered invisible and can regain the spotlight in their customers’ financial lives.