The word digital has made a strong entrance into banking, resulting in new market trends, new customer expectations, and new potential ways to create and deliver value.
Based on the answers for our research sub-questions - mainly sub-question 1; from; “Market conditions and change drivers in the financial industry” (see “5.1.6. Sub-conclusion”) - the following paragraphs will discuss potential scenarios for the financial industry. These paragraphs will constitute the basis for a qualified discussion of the other research sub-questions, in order to seek an answer to the overlying problem statement. As such, the preliminary discussion will be grounded on the three scenarios shown in figure 11; Bank’s domination, Banking reinvented, and a Banking ecosystem.
Figure 11 – Future Scenarios in Financial Services
(Source: Banking Business models of the future 2016)
5.1.1 Clarifying the Three Scenarios
Bank’s domination entails regulators increasing the entry barriers for digital-driven disruptors. This scenario involves banks maintaining customer trust and their relationships with established organizations, i.e. banks succeed in protecting their traditional business models. An underlying condition is banks’ ability to keep pace with shifting customer expectations (Kobler et. al, 2016).
Banking reinvented suggests that new actors will gain customer trust, and will be able to offer appealing services, as process outsourcing enables novel actors to enter the market with no noteworthy infrastructure. Meanwhile, established banks will still cater to distinct product segments, but will fail to adopt new technologies, as old legacy systems diminish innovation speed (ibid). As a result, innovative businesses leveraging new-era banking ideas will overtake several operational areas from conventional banks.
Finally, banking ecosystem suggests that customers will prefer personalized services, and banks will likely undervalue the power of networks. Meanwhile, the digital revolution ignores well-accepted boundaries and rules, resulting in disruptive players gaining market share. Consequently, banks lose ownership of customer relationships to a number of new entrants. Successful banks convert themselves into platforms, offering core competences and infrastructure to an ecosystem of highly skilled suppliers (ibid).
5.1.2 Bank’s Domination
An argument for bank’s domination is banks’ capital reserves - as recognised as a key resource by Osterwalder & Pigneur (2010) – and thus their ability to potentially consolidate the industry by obtaining innovation through fintech acquisitions. Moreover, banks can provide deposit-guarantee and personal advisory for customers; leveraging brand, trust and security to maintain customer leadership in deposits, lending and money management (Appendix 2, IP6:Q5).
However, PSD2 will allow fintechs to integrate and support the current payment- and account information schemes, with the overall purpose to open up the market, lower entry barriers, and enable them to build on existing infrastructure (Appendix 2, IP7:Q5). Furthermore, comprehensive regulatory compliance and bureaucracy are hindering innovation in banks, and limits integration and utilization of customer data to develop value-added services. Meanwhile, fintechs can offer superior services, as less regulatory obstruction enables the application of Big-data to gain knowledge-lead in the development of personalized customer solutions (“FinTech 2.0”, 2016).
5.1.3 Banking Reinvented
Banks seemingly acknowledge that advances in technology leads to purely digital solutions. Therefore, banks will seek to offer products and services that can be integrated with third-party solutions; which the market will open up to when PSD2 are implemented by national law. Besides, banks will be able to maintain their position within specific product areas, as fintechs and digital ecosystems’ resources do not allow for capital-intensive lending e.g. mortgages, car-loans etc. Furthermore, a point stressed by IP7:Q13 and IP3:Q5 (Appendix 2), is the continuous need for physical presence and personal advisory in capital-intensive purchases. And though the thesis argues that the future customer profile for fintechs and banks will be the same, individual customers can still seek to complete various customer jobs in different contexts e.g. personal vs. business. As such, banks will be able to leverage these operations to create tailor-made services and customer experiences, while high-value digital services might become commoditized. Meanwhile, compliance operations in the industry for financial services might become more centralized, making adaption to regulatory change easier.
In the future, non-bank institutions (NBI’s) should not be underestimated. Bundles of data could make such companies able to deliver superior customer experiences and improve value propositions.
In addition, banks might be overtaken in compliance expertise and financial security as technologies within smart data interpretation (AI) and cloud-based security advances. Lastly, while personal advisory might take place at physical bank branches, future generations will possibly accept a more convenient practise, receiving “expert” advice based on smart data or algorithm decisions.
5.1.4 Banking Ecosystem
Several arguments exist that society is moving towards a digital financial ecosystem. A manifestation of technology will foster new customer expectations to make services more convenient and user-friendly e.g. by biometric identification. Likely, this will lead to an environment where crypto-currency and digital transactions, to a large extent, will make cash obsolete (Appendix, IP3:Q4). Moreover, non-banking institutions sit on huge amounts of customer data, further supporting the likely scenario that traditional players will be out-competed by alternative platforms. With the high fee levels, in traditional banking e.g. in money management, it is also likely that customers will pursue lower fees by converting to alternative investment platforms, as automatized suggestions and social trading will increase the incitement for customers to manage their own money (Kobler et. al, 2016).
In contrast, concerns could arise regarding personal data security, while biometric solutions could involve political and ethnical issues. Meanwhile, customer inertia might emerge as non-banking institutions enter the industry with no long-standing experience or expertise in financial services. As well, the potential of NBI’s might be blocked by political regulations in order to protect the established industry. Finally, if money management becomes social on a larger scale, the general risk in financial markets might increase dramatically – making social trading a short-lived trend.
5.1.5 A Most-likely Scenario
Based on the scenario discussion, the thesis seeks an understanding of a most-likely scenario. This will enable the discussion of how to build combined sustainable business models to deliver joint and improved value propositions.
In the near future, it is likely that banks will maintain a favourable position within deposit and lending operations. Meanwhile, the PSD2-directive will open up markets, allowing various (fin)tech-companies to deliver value-added services to customers. This will force banks to reinvent themselves as competition grows, finding their operating space in a more nuanced environment. Consequently, banks might be left with no other choice than to transform into market places, offering their competencies and resources to a broad range of highly skilled providers within the industry (Appendix 2, IP6:Q2).
Long-term, the industry will likely move towards to ecosystem structure. However, several barriers still exist that need the broken down. Yet, while these industry changes seem inevitable, one must ponder if political incitements will protect the established industry, hampering innovation, and the potential for strategic alliances across the sector.
As such, the thesis’ provisional conclusion must be that the industry is moving towards the intersection between Banking reinvented and Banking ecosystem.