When is the last time you went into a bank? Was it a good use of your time? How often do you visit a bank in person each year these days? How often do you think you will visit a bank in person 10 years from now?
The answers to those questions will likely vary quite widely depending on whom you ask. But if we limit our discussion for this article to retail banking, we may begin to see a clear writing on the wall: our need to visit a bank in person will decrease over time. This is not to say that our need for financial services will decrease. It’s how and where we avail those services will undergo significant transformation.
Think about this for a moment. The most frequently used banking services are deposits, withdrawals, and fund transfers. While there are many other services offered (for example, loans, savings programs, lockers, etc.), we rarely need frequent visits to the bank for those services. For many of those frequently used banking services, we can get most of what we need to get done today through some combination of internet banking, ATMs, and mobile money.
In fact, I would go as far to say that we may not even need as many ATMs 10-15 years down the road, at least for two reasons. First, more financial transactions will be digital (cashlite) over time. Many of the merchants around us will accept digital money. So we will not need to take cash out from an ATM for our regular expenses as frequently in 10 years. Second, we will have a really extensive network of “human ATMs” all around us. In a future where mobile wallets (m-wallets) will be as pervasive as mobile phones today, many people around us will have m-wallets on their phones; and when we need to pay someone (who doesn’t yet have an m-wallet) with cash, we can simply cash-out through a friend or family.
What is also interesting to note is that for none of the alternative ways of extending common banking services do we need as heavy an involvement of traditional bankers as we did in the past. The internet banking channel is designed, developed and hosted by technology companies. The ATM networks are often managed by specialized technology networks. The mobile banking services (at least the successful ones) are provided by non-bank technology entities called payment service providers. And all three of these channels function over infrastructure developed and managed by internet service providers and mobile network operators, who are also technology companies.
The future of retail banking is more tech than banking. That thought is worth a pause to reflect upon. It has profound implications on how the retail banking sector as we know it today is poised to experience a tectonic shift. And if the traditional banking sector fails to take notice and do things differently with a heightened sense of urgency, it just might be too late for many of them.
Let me give an example. While there are many examples at the global level (and I will highlight some of those later in this article), let me give a local example first so that we don’t dismiss the threat with our usual “sure, this happens in other markets, but our context in Bangladesh is different”.
Readers of the Financial Express are not unfamiliar with the recent growth of mobile financial services (MFS) in Bangladesh. MFS in its current form in Bangladesh is largely a domestic funds transfer service. So how were funds transferred before 2011? The primary formal channel was through banks (and post offices), while the informal channels included hand-to-hand transfers as well as transfers through courier services. Also, remember that before 2011, there were no MFS players in Bangladesh. Now fast forward four years. What do we see today? The overwhelming majority of people-to-people funds transfers are done through MFS – over a billion dollars per month, according to Bangladesh Bank data.
The skeptic among the readers might say, so what, those transfers are still done by MFS operations of traditional banks, right? Not really. In the Bangladesh MFS market today, the 20 odd MFS operators that are wholly owned by banks constitute at best 15% of the total market collectively. The remaining 85% of the market is owned by a single player that is not wholly owned by a bank. If we take a closer look at this single player, we will see that it is conceived, evolved and managed by people that are far more tech-oriented than traditional bankers. And I would argue that it is that very specific mindset and capabilities that is behind its dominant market position. From a strategy lens, we would classify such endeavors as disruptive innovations that monetize a large segment of the population who are either overshot customers or non-consumers.
There is a term that is used globally for this new breed of organizations – they are called Fin-Tech firm. Fin-tech is not only about using technology, it also encompasses fundamental mindset shifts in understanding customer needs at very granular levels, in thinking about distribution networks completely differently, and perhaps most importantly, in embodying a level of operational excellence that leads to their agility. Unfortunately, these traits are not very common among at least the traditional banking players I’ve had the opportunity to interact with in Bangladesh.
Fin-tech is getting meaningful traction at the global level too. The investments Fin-tech firms have been able to attract paint a telling story: in 2013 they attracted $4 billion, while in 2014 they attracted $12 billion in investments. LendingClub alone has arranged $9 billion in loans. A completely online bank called Simple was acquired by BBVA of Spain for $117 million. But these initiatives are still relatively small compared to the global banking sector. However, global financial institution giants are taking notice – HSBC, Citi and BBVA have set up special purpose venture-capital-like arms to watch and invest into such endeavors.
It’s time banks in Bangladesh begin to take notice too. But a critical success factor for taking notice and figuring out a course of action is to take an honest look in the mirror and ask whether we have the right mindset and skills to notice the trends and whether we have the right organizational capabilities to identify and execute on a course of action. Without those two things, such efforts might simply be in vain.
This article was written in 2015.
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