How a perfect storm of disruption is upending the banking industry
As we all have witnessed over the past year, Covid-19 dramatically accelerated the transition to digital services across multiple sectors and industries. One sector that has been more impacted than most is banking. The pandemic has forced banks and their customers to embrace digital tools and processes. And, because of lockdowns and social distancing, the number of digital banking transactions conducted via online channels is skyrocketing.
Indeed, in many cities around the world there is already a sharp decline in the number of physical bank branches as consumers transition to mobile-first and remote digital transactions. According to a new Boston Consulting Group survey, “one in four customers is planning to either use branches less or stop visiting branches altogether after the crisis.”
However, while Covid-19 has served as a catalyst for digital transformation in 2020, the banking industry is subject to deeper and more fundamental disruption by new entrants. One exciting example is Solarisbank in Germany, which has partnered with Samsung Pay to accelerate financial markets transformation and reimagine the consumer experience by making people’s lives easier in these challenging times.
Innovation in banking is driven by multiple factors, including technology, regulation and growing consumer expectation for instant and digital experiences. Let’s take a closer look at each of these factors:
1. Technology. Traditional banks developed their legacy banking infrastructure over the past several decades, with on-premise deployment of an outdated, difficult-to-adjust and expensive-to-maintain computing infrastructure. The rise of cloud computing has brought about breakthrough agility, flexible resource consumption models and lower cost structures for players who develop new platforms from scratch and are not stuck with legacy systems. Cloud-based infrastructure allows rapid deployment of new services.
2. Regulation. On the regulatory side, we are entering the era of Open Banking. Regulators around the world have been promoting opening up the banking systems to increase visibility, competition and participation of new entrants to better serve consumers and grant them control on their data. This is most pronounced in Europe with the adoption of PSD2, which forces legacy banks to allow 3rd parties to retrieve bank account information, or initiate payments, on behalf of the consumer.
3. Consumer expectation. Lastly, consumers are getting used to instant service. They much prefer simplified user experiences and mobile-first interactions, rather than having to visit their bank branch. Indeed, 60% of consumers would rather manage all their financial products through a single app vs. traditional banking, according to EY survey.
The slow adoption of cloud technology by legacy banks, coupled with the introduction of Open Banking and the inherent high cost of legacy infrastructure, have made the incumbents vulnerable.
