The bank of the future

BY NLM Writer

ves is integrated with technology, from the way we are taught at school to the way we handle simple tasks like communicating. It has extended to corporate space where it has had major disruptions.

One area that has experienced this disruption is the financial sector, which has seen piecemeal change – from the introduction of the credit and debit cards to the establishment of digital currencies. The more the sector applies digital innovation, the more efficient and competitive it becomes, which, in turn, continues to drive disruption, especially in the capital markets, lending, payment, and wealth management departments.

Banking institutions are always integrating technology in daily operations. It is the new norm as, without digital innovation, such institutions wouldn’t survive the competition in the current market. According to a recent report by Moody’s Investors Service, banks that aggressively pursue agile digital strategies will defend their core franchises, broaden their customer bases and improve efficiency, supporting their creditworthiness while laggard banks will face increased customer attrition, reduced pricing power and uncompetitive cost structures.

It goes without saying that incumbent institutions and new entrants that harness the right technology will be the ultimate winners as they will be in the league that shapes the bank of the future.

However, in order for the bank of the future to be actualised, there are key areas of focus. Customer satisfaction is one of them. Today, customers have been accustomed to array of digital products and services that they feel less attraction towards the traditional services. Once customers looked to banks for financial advice in their operations; now, with new entrants incorporating online platforms, such as through mobile phones, customers are shifting as they focus on seamless interactions and transactions. The bank of the future will need to focus on meeting the digital needs of the customers. Banks that can streamline their operations to successfully implement this new technology or collaborate with fintech institutions are the ones that can keep the current tech-savvy customers.

Cash management

Secondly, there will be a need to focus on the competitive dynamics. In the recent years, banks have faced some stiff competition from fintech institutions as they have changed the way financial services are developed, delivered and consumed.

In terms of payment/cash management the likes of AliPay and Kenya’s M-Pesa have really disrupted the financial sector as they have both changed the way people pay for goods and services as well as how they manage their cash.

For instance, financial inclusion has grown to 75.3% in 2016, increasing by 50% in the last 10 years.

Cryptocurrency as a means of payment are another threat as they remove the need for centralised institutions. Despite its use in mainstream payment remaining limited, it has really affected the global remittances sector whereby many financial institutions have averted as result of the risk of money laundering and financial crime.

On the other hand, the introduction of mobile lending applications has seen a rise in non-bank lending especially in developing regions whereby banks are not likely to give out loans to the people.

According to Moody’s, in order to survive, financial institutions will be required to integrate this technology in order to be at par with the fintech organisations. For instance, even though tangible gains from the block chain technology are likely a long way off for the capital markets, banks need to commit to the technology so that they can tap into its potential.

Infrastructure and cost management are other key determinants that will be crucial in shaping the bank of the future. With digitalisation growing, banks will have to start upgrading their IT systems, automating their services and reducing the number of branches they have. However, if they are to profit from this, they will have to make high initial investments and incur significant ongoing maintenance costs.

A caveat here is that banks need to be careful when reducing their branches in favour of digitalization because, as according to Moody’s, the closing of the branches will highly depend on the region as well as the income level and digital literacy of local consumers.

The future of the financial sector will depend on the regulations in place. For years, the regulations have protected banking institutions leaving fintech institutions to only be successful in areas where regulatory compliance is manageable. This is due to the fact that banking institutions have a funding advantage over fintech firms because they have access to stable retail deposits.

As such, successful competitors may choose to partner up with big technology companies thus changing their business models in order to bypass the banking regulations.

In addition, willingness by regulators to encourage competition and innovation by increasing regulatory initiatives like sandboxes and open banking initiatives without losing sight of risks towards consumers will be a good sign for new financial service providers as they get to understand the regulatory landscape to reach wider areas. (