Google the definition of “bank” and you receive back the following: “land alongside or sloping down to a river or a lake.” Correct, but not quite the definition most people expect when they think of a bank today. Clicking to the next page of the search results returns definitions of financial establishments that use money deposited by customers for investment, pay it out when required, make loans at interest, and exchange one currency for another.
A payment is not banking
Interestingly, there is no mention of moving money around, making payments, or the provision of current accounts, even though these products and services have been provided by the banking industry since before the 18th century. For most of that time, the retail (payments) side of banks have been interwoven with the investment side.
The retail payments side was, arguably, never actually a banking function in the first place. A payment is simply the act of shifting some arbitrary common value from one place to another, and banks primarily store it rather than move it. However, payments did become a de-facto banking function, because payments involved money and trust and that’s what banks did.
Two options for banks
Today, following the introduction of open API (application programming interface) principles and the PSD2 (revised Payment Services Directive) in Europe, are we now seeing a 21st century banking reboot? If we are, then banks are now faced with one of two options: they can whine about the destruction of their business models at the hands of the legislators and watch as it slowly erodes, or they can embrace the future and the opportunities that open API banking presents. They can look the other way, or they can rise to the challenge. The application of innovation is open to all, and the art of futurology is not the reserve of the challengers.
The real threat to banks
The established banks have a clear advantage: strong consumer branding, the benefits of an established customer base, and the reputation of trust that has been built up over the years. Challenger banks have none of these things, but their lack of legacy means they can move quickly to exploit opportunities. Even so, the challengers need critical mass, for which they need something a little more ground-breaking than a current account on a smartphone. Without innovative products and services to attract customers, customers will have few reasons to migrate.
What does critical mass look like? Without giving away the nature of any killer banking application, let’s just assume there is one, and that everyone with a current account really wants a part of it. Here, the challengers have the clear advantage. They can move quickly to design, develop and deliver the services that consumers are demanding, and then they can sit back and watch the churn.
The established banks are limited by the legacy systems that support the number of customers they serve, and they are powerless to match the agility of their adversaries. Luckily for these banks, however, there is no killer application … yet! Also, any such application is unlikely to be found within existing banking services. It is much more likely to be found outside the core, where the challengers shine. But the challengers are shining alongside the fintech start-ups, and the fintech start-ups are keen to take advantage of any emerging opportunity, so the killer application is just as likely to come from a fintech start-up.
Banks and fintechs: A good match
If established banks are to emerge triumphant, they are going to need help to develop the services their customers are demanding, and they are certainly not going to receive this help from the challenger banks. Instead, they should be looking to form partnerships with fintech organizations able to develop and deliver new and innovative services to existing customers, quickly.
This kind of collaboration combines the best of both worlds: speed of delivery, allied with an established customer base and the trust that goes with it.
If the firm foothold that has been established over many years is lost, the inevitable slide down the bank, so to speak, is going to be swift, and the water at the bottom will wash away all traces of what was there before.
About the author
David Griffiths is Director of Payment Services for Virtusa, a global provider of information technology consulting and outsourcing services.