By Sarah Caroline Bell
With mobile payments, as well as mobile and online financial services entering multiple countries across the ASEAN, what does that mean for the future of traditional banks and their profitability?
Customers are tired of paying high everyday fees simply for accessing their money. Looking at Malaysia alone, consumers have reported their dissatisfactions with their banking systems. A Frost & Sullivan study found that customers were dissatisfied enough to not be likely to promote their bank to others. Customers also found their banks to be inconvenient, with 33% of those discontinuing accounts doing so based on the location of the bank.
The banking experience is not tailored to the needs of consumers. This is clearly a problem for banking, as new providers are swooping in to provide a faster, cheaper, more flexible experience for customers dissatisfied with what traditional banking provides, yet also lacks.
Tan Sri Azman Hashim, the chairman of Asian Institute of Chartered Bankers, has noted that “up to 10% to 40% of the banking revenue will disappear by 2025, as fintech is challenging the status quo of the financial industry”.
Adapting to the mobile environment
The shortcomings of traditional banks have provided an opportunity for other providers to step in and provide a tailored experience. This has not gone unnoticed. Banks are aware of a growing need to adapt to the mobile banking environment.
And they appear to be doing so in 2016. Intelligence researchers Ovum observed that banks across the world are set to significantly increase spending on new payment technology in 2016. About 61% of banks will increase their spending on payment technologies this year, up from 52% the year before.
Banks are spending big, developing mobile payment technologies to keep pace with the rapid development of alternatives available to their current customer base. The alternatives for customers span a wide area of services and products traditionally seen as the exclusive realm of traditional banking alone.
Taking advantage of banks’ sweet spots
Retail banking is in threat of being dominated by online providers. Online providers have a crucial advantage in that they are able to cater to their clients’ needs faster, at any time of day or night, and due to a lack of a physical establishment, can do so in a more cost effective way.
Richard Barrington, a senior financial analyst, agrees that online banks have an advantage, in particular with savings. “If you’re comfortable with technology and don’t feel like you need face time with the people handling your cash, keeping your savings in an online bank is a great option. You’ll see your money grow faster than with a big bank, and you’ll pay less in fees. As far as checking accounts go, online and traditional banks are pretty much neck and neck,” he said.
Looking solely at transactions, where banks usually charge transaction fees, alternative payments providers are seeing an opportunity to provide swifter transactions at a greatly reduced price. Juniper Research has predicted that “the value of mobile transactions [will reach] up to a whopping $1.3 trillion annually by 2017, predicated on the growing interest in peer-to-peer money transfer, mobile retail in the high street, so called ‘couch commerce’ in the home and, contentiously, its view that NFC is going to take off pretty soon everywhere.”
One transaction type in particular, wire transfers, has already been offered at a greatly reduced rate by online providers. Paypal has been undercutting wire transfer fee for years, other mobile applications and payments processors have taken note of this, with plans to roll out cheaper and more efficient transactions of every type, most notably reducing the cost of merchant transactions for business.
A shift towards smart finance systems
Advisory services is another potential area for mobile providers to specialize in. Mobile platforms are the ideal environment for Roboadvisory in place of a traditional advisory service. Roboadvisors offer many benefits to consumers: clients can develop their asset allocation plan, and the application can help monitor the activity of the client’s investments against the client’s preset targets. It’s timely; with a notification capable app, clients will be able to make swifter decisions than ever before.
On the usefulness of Roboadvisory, ICICI Securities Senior Vice President, Abhishake Mathur said, “They help customers make more informed decision on what to buy and how much of an asset type to buy.”
Like Roboadvisory, Algo trading is perfectly matched for a mobile banking platform precisely because of what it deals with, computer programs determining trading strategies. The use of an application means customers can be notified of changes that they can instantly respond to if they choose.
Smart finance systems, such as Roboadvisory and mobile Algo trading, appears to be the way forward. Brett King, author of Augmented: Life in the Smart Lane, agrees. In his recent publication, he stated that “smart finance in the context of the individual eliminates the need for financial literary, financial education and complex products and budgeting in favor of tool that monitor, advise and solve financial problems as they occur, in real-time.”
Blockchain is another platform that seeks to provide a better system in regards to transactions. Blockchain provides safer transactions at a lower cost than traditional transactions simply because of a lack of a middleman, such as a bank, and also due to the fact all transactions are supported and encoded on the web in an open decentralized database.
In fact, blockchain is so safe it is even said to be unhackable, a major advantage over a traditional payments processing system susceptible to attacks.
However, banks do have the option of utilizing blockchain themselves. Speaking on the potential of blockchain, Morgan Stanley says, “Banks will be able to reduce the teams of people responsible for authenticating and approving each specific transaction.” Because of this, they will be able to reduce their labor costs, and with the adoption of blockchain, can also be more productive and therefore more competitive in the online banking environment.
Towards a future of collaboration?
At the 20th Malaysian Banking Summit, Anshu Nahar, of global management consulting firm, AT Kearney stated that “banks will become more like the very fintechs that threaten them or be subject to extinction”.
What is apparent, is that technology is poised to become the biggest determiner of success in banking. Goh Peng Ooi, Silverlake Axis Ltd founder and group executive chairman, recently spoke to The Edge Financial Daily noting that, “banks that are weak in technology are definitely going to lose out in this chase for new revenues, and suffer impacts on ‘old’ revenues.”
Traditional banks have three strategic choices going forward: the traditional way of banking, adaptation to the new mobile environment, or they can choose to collaborate with fintech providers. Is it possible for traditional banks and fintech to operate side-by-side?
A banking startup in Vietnam, called Timo, is a digital bank operating out of a modern café in Ho Chi Minh City called ‘Timo Hangout’. It caters to people who want a different banking experience, with no paperwork, no queues, all managed by an application users can download on their phones.
Timo is a collaboration between itself and a traditional bank, VP Bank, with profits being split equally. While allowing VP Bank to enter the mobile market, the arrangement also provides value to Timo as well, through being linked to an established, creditable financial institution.
It is an interesting concept that could be the way for traditional banks to continue their traditional banking functions, while also offering a more modern service to customers who demand it. However, it remains to be seen whether this model is effective.
A negligible impact?
Others, even those within startups themselves, believe fintech will have little impact on the profitability of traditional banking systems.
Siew Yuen Tuck, the co-founder of fintech start-up, Jirnexu, believes the major banks won’t be affected greatly in the short term, “If fintech can offer consumers [a] level of convenience plus value [such as faster service, better interest rates], some consumers will embrace that,” he stated recently on the subject of fintech and banking giants in Malaysia.
Time will tell as to whether banks are able to adapt fast enough to be competitive in the new banking and financial mobile environment. What is true however, is that the number of mobile banking users are increasing. They’ve increased to 7.3 million in 2015, from 1.56 million in 2011, according to BNM. Which mobile providers will profit from taking advantage of those numbers?