Why do we need banks anymore?
The question might sound provocative, but it’s an important one that financial institutions will have to answer in coming years.
Their goal is to earn money with expertise that only they have. But what is that expertise?
That’s the first thing banks will have to determine – because in the final analysis, many younger clients could just as well entrust their money to companies like Apple, Google or Facebook. And there are other new companies, thousands in the United States alone, trying to hijack the finance industry’s business with new technology and fresh ideas.
Banks face a dilemma. On one hand, they have to invest heavily in new technology because customers will only accept service providers on the cutting edge. New players are constantly introducing fresh concepts for payment services, financial products or access to capital markets. All the while, big banks are struggling to update their old infrastructure – and despite their frenetic pace, they risk being left behind.
The financial industry is also pressure from many sides. New players are pitching private clients with new payment systems – and they will keep expanding the scope of their products to get more control over users.
On the other hand, it would be wrong for banks to focus on technology alone. Perhaps a few banks can get away with it, but not the entire industry.
Financial institutions instead have to answer that key question: Does anyone still need us? The answer can no longer be the same for every bank.
For example, it is not enough to invent new apps, which everyone else can invent too, and hope they will produce a unique “customer experience.” The whole approach to customers, technology, products and marketing has to be something different.
One bank might concentrate on developing sophisticated products for big investors or complex financing tools for companies. But then it really has to offer more expertise in those areas.
Yet another bank might focus entirely on consulting. If so, the teams they put in front of clients cannot have any weak links at all.
The other key question for banks in the next few years is “Where to invest?” In which technology, which employees, which products and which markets? There won’t be enough money to invest in everything at once.
We can learn from other industries already swamped by the digital storm.
It used to be a functioning business model for many newspapers to sell more or less similar content. That doesn’t work so well these days.
Bookshops used to be able to co-exist in the same way, provided they were in different shopping areas. Nowadays a shop has to specialize if it wants to survive digital competition, by focusing on antiquarian treasures, comics or children’s books, for example.
Musicians used to live on records and CDs. Today many have to market themselves for free on YouTube, just to get noticed. And then they hope that fans come to their concerts and, in addition to the ticket, buy CDs and fan articles before downloading a few items at home.
The financial industry is also under pressure from many sides. New players are pitching private clients with new payment systems – and they will keep expanding the scope of their products to get more control over users.
In some areas like car insurance or mortgages, established players have already lost contact with many clients.
In others areas like analysis of information – long an exclusive domain of banks – new ways of tracking great volumes of data are devaluing a key business advantage.
A third scenario involves technical infrastructure. Technologies used for the digital currency bitcoin are a threat, for example, because they could eliminate big profits from currency transactions.
There is still a tendency for banks to look back too much. Many are still dealing with the consequences of the financial crisis, and coping with enormous pressure from supervisory bodies.
Banks already know the challenges technology will pose, but, by and large, they still don’t know the future course they should take. The great danger now is not planning far enough in advance – and playing catch-up again.
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