Dealing with the Risk of Disintermediation

Mobility has transformed the underlying calculus of banking. As a generation grows up accustomed to ubiquitous access to yesteryear’s supercomputer on their person, mobility becomes more than a channel; it becomes the focal point around which a majority of customers construct their expectations of banking.

Mobility has transformed the underlying calculus of banking. As a generation grows up accustomed to ubiquitous access to yesteryear’s supercomputer on their person, mobility becomes more than a channel; it becomes the focal point around which a majority of customers construct their expectations of banking.

Thus far much of the disruptive action around mobile banking has played out in the payments space, be it peer-to-peer or commercial transactions. But given the relentless advances in mobile technologies, the epicenter of disruption will start to shift towards the core of banking, to loans and deposits. And as that happens, mobility has the potential to significantly disintermediate banks from the customer in more ways than one.

  1. Customers will opt for seemingly “bankless” payment experiences: Customers are already grappling with a surfeit of mobile payment options, 26 in the U.S. alone, at last count. The action will continue to heat up, but customers will increasingly tend toward a model that eliminates “payment rituals” in favor of experience even if it means disengaging their payment activity from their bank, at least at the front end.
  2. Customers will borrow on the path of least resistance: Platforms like Prosper and Lending Club are already disintermediating banks by directly connecting borrowers and lenders. And customers seem to like that model. Lending Club, for instance, boasts a personal loan portfolio of US$ 4 billion, three-fourths of which has been added in the past two years. In the future, SME customers will increasingly bypass banks for relationships with similar platforms to negotiate personalized borrowing arrangements.
  3. Customers will park their money where it counts: In China, where household saving rates are high by almost every standard, 8-10 percent of deposits are now flowing into Yu’e Bao, Alibaba’s money market fund. Elsewhere, companies like Groupon, PayPal and Square are already navigating access to deposits of their small business customers by offering them merchant accounts. This is clearly a trend that represents a huge risk to the banking sector’s overall performance, greater than that posed by disruption in payments.

The single biggest lever that banks have to thwart this invasion is the years of trust they have built with their customer relationships. And banks also have the added advantage of access to customer financial data which can help them improve their understanding of customer needs and deliver products and services that are designed for individual contexts. Through it all, they have to factor the rising expectations of experience among banking customers into every product, service, transaction and interaction.

Partnerships are the Future of Banking

Mobility is no longer a concept whose potential can be defined merely by enumerating handsets shipped, connections created, apps launched or data consumed. It is a phenomenon that is estimated to have generated a total economic value of almost US$ 10 trillion last year, which makes it the third largest economy in the world after the U.S. and China. I should also probably mention the 11 million jobs that it was directly responsible for creating around the globe.
First the good news: millennials vote banking as the sector most in need of disruption. Now the bad news: most millennials believe that disruption will be delivered from the outside, by startups and conglomerates grounded in technology rather than financial services.
What millennials want, they get. They already make up a third of the world’s population and in a mere 10 years will account for three-fourths of the global workforce, making them a cohort that is as hard to ignore as it is to please.
Now, the debate is not whether banking relationships are due for radical redesign; they definitely are. It’s about how much influence traditional financial service providers will end up ceding in the process.
In banking as in any other sector today, mere incumbency no longer guarantees success or even relevance. But is it really possible that the New Banking Order will be built around the core competency of technology supported by financial expertise, rather than the other way around? Will Google become a verb in the context of banking too?
Not quite, according to Chris Skinner of the Financial Services Club. While Google’s expertise in organizing and contextualizing information assets has the potential to redefine banking services and relationships, it is highly unlikely the tech giant will make a play for a front and center position in financial services.
The more pragmatic view, therefore, would be to look at technology heavyweights as prospective partners in pushing the envelope in banking. Like the big bank partnerships with Apple Pay, for instance, where the immediate risk of disrupted revenue streams is more than offset by the larger benefit of a larger and more dynamic mobile payments marketplace.
The payments space, in fact, perfectly captures the collaborative future of the banking industry. To paraphrase one analyst report, banks simply cannot afford to commit resources to confront or even catch up with the frenzy of activity in payment innovations. The more productive alternative would be to build partnerships that enable customers to transact across payment models, platforms and channels. Payment providers are already opening up their platforms to third party developers, while startups, Plaid and Standard Treasury, are leveraging access to banks’ internal data to launch new innovations. All in all, a collaborative model will cement a pivotal role for banking in the payments ecosystem while focusing and streamlining payment integration, driving cost-effective innovation and creating a win-win for all stakeholders, starting with the customer.
As for banks, they will continue to build on their core competencies of fostering holistic financial relationships and delivering comprehensive financial solutions while exploring every opportunity possible, including technology, to continually redefine the banking experience.