The media is full of reports on how banks are under threat from upstart and technology companies that are disrupting the banking model. Thrown into the mix are Millenials, the mobile revolution, branch efficiency, P2P payment companies, P2P lending, and many others. Terms like digital disruption and customer experience are sprinkled liberally to drive home the analyses.

However, we need to take a step back and try to understand where the threat to banking actually is. As we’ll see, the threat is actually a great opportunity for banks to step up and take charge of customer relationships.

At the most simplistic level, a banking P&L comprises of:

1. Payments revenue

2. Lending revenue

3. Fee revenue

There is no doubt that the payments revenue model is undergoing significant transition due to the digital disruption – especially when credit and debit card transactions are supplanted by other means of payments – most notably direct debits or virtual currencies. And indeed a large portion of new age mobile payment models such as Apple Pay and Paypal are still based on credit and debit card transactions. The virtual currency model (such as Bitcoin) has the potential to replace a bank but that doesn’t strictly fall under the purview of the digital disruption, even though everything today is being classified under digital. Getting back to payments, when a private network card is used for transactions (such as many store cards), the traditional payments model is bypassed because the major networks and banks don’t make their payments interchange revenue. Not considering the fact that the lending portfolio has an upside for the underwriting bank, and the consumer trends of increased spending have an automatic upside for consumer banking. It can again be argued that the total money supply and transactions base has potential to increase because of these developments. The biggest risk here is the loss of customer engagement, and being relegated to a back end operational entity.

Lending revenue is really a function of what a bank does with the money it has. So we don’t need to talk about it except when we speak of retaining and acquiring customers, and then growing their account balances. While this may affect a particular bank if it falls behind in these strategies, there is no threat to the banking “model” per se. The talk of P2P lending by non-bank or online-only banks taking over is not fully relevant. First, these entities then become banks themselves, or the market grows enough for traditional banks to provide this facility to their customer as well (making them P2P lenders). In fact, we’re already seeing a huge influx of institutional lending through the P2P channel rather than peer lending. Also, so far, we haven’t see traditional banks getting into P2P lending because of the opportunity costs (they have ample capital at lower rates). However, once this market reaches critical mass which is likely soon, the non-bank entities will face the same challenges as a more traditional bank, albeit starting out with a lower cost base which may not be really sustainable in the long run, as competition heats up. The P2P lending threat then becomes only a question of “how can banks prepare well for the eventuality that P2P lending will become important for them to adopt”.

The fee revenue is a question of value. As products commoditize, and perceived or real value decreases, fees are difficult to charge. Again, the banking model is under no threat. We see similar situations in all industries, including technology and retail where freemium models and rampant discounting promotions are the norm. This is more like a question of strategy, rather than digital disruption. For times much before the internet hit the market, customers have found this question difficult to answer. In addition, changing your bank is not a frequent phenomenon as the vast majority of this switch comes as a result of life events (change in status, change in location etc.). So the biggest risk here is the loss of customer engagement by turning into an un-differentiated provider of essential services.

That said, what is the real threat from the digital revolution to banking?

Contrary to the doomsday claims, the threats are the same as they have always been: how to innovate and provide better customer service leveraging the new technology capabilities that are available? In most cases, the answers are simple and lie in two basic drivers.

1. Reducing operational costs and improving agility

There is no doubt that advances in technology provide significant opportunities. Straight through processing of transactions, single identity of customers, integration of systems, deploying technology to enable or introduce new business processes in marketing and customer service, and overall just eliminating or breaking down organizational silos. For example, how can you automate account opening online, provide customers single window access to different kinds of accounts, automate marketing campaigns based on better customer analytics across the product portfolio, provide easy loyalty points redemption, and so on.

Each of these has potential to not only reduce costs but also provide increased leverage to innovate more rapidly thus influencing revenue growth as well. For example, by creating a more advanced and leaner operational landscape, the preparation for the eventuality of P2P lending is strengthened. Similarly banks will be much better prepared to capitalize on data by helping retail customers make the most of their money, and connecting buyers and sellers much better.

Much of the digital transformation or disruption spoken about in this category is simply assessing the current operational & technology landscape, identifying a roadmap and executing well. There will always be organizational dynamics to control, current investments to rationalize, compliance requirements to meet, and technology migration challenges to address, but these are the same everywhere. There is really nothing new, and instead of a threat, we should see the digital advancements as opportunities to accelerate the solutions to these problems.

2. Providing better customer experiences

Several doomsday arguments end at the topic of customer experience. Again, mapping your customer journeys, and leveraging technology to provide convenience and context is all that is needed.

Examples on mobile include check deposit, bill pay, money transfer etc. Examples on customer service and marketing include providing context through a centralized customer data store, and improving communication and information exchange across the various product or business units. These scenarios are far from threats to those who can think clearly about their customer segment and outline exactly how they should best meet the needs of this segment.

A large opportunity also lies in providing the backbone that links the non-banking needs of the customer, essentially thinking beyond banking and becoming the facilitator of non-banking transactions as well. Examples include day to day activities like shopping or fitness, leisure activities like travel, and other services such as medical and healthcare.

 

Summary

In conclusion, while the title of this post may have seemed extremely controversial, the real threat to banking is within banking itself by way of increased commoditization, and in losing control of the customer conversation. Its also not a new phenomenon by any means. Banks have been subject to commoditization and have been losing the control of conversation to independent 3rd party advisors for a long time. But now, availability of technology makes it easier to counter the trend. So the digital transformation is actually a blessing, not a threat. However, all of the digital transformation advice will be futile, if the design of processes is not transformed to reflect the customer’s perspective – how do we partner with customers to serve their end goals. In other words, how do we rekindle the very purpose of banking. That revolution is internal, and been long overdue.

Your thoughts will be appreciated.