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April 13, 2022

Tech firms circle traditional banking services

Challenger banks, internet banks and even non-banks are all nibbling at the edges of traditional banks’ business. To survive, high street banks need to get slick quick, says Elenjical Solutions’ Nkosinathi Sikhakhane.

Do you remember a time when banks were the bustling hearts of any community? Depositing cheques, paying bills, getting cash and organizing loans, it was the essential centre of business and personal life. Then in the 1980s ATMs came along, and consumers’ relationship with their banks became slightly less personal, and slightly more digital…

…Fast forward 40 years and the once-dominant bank is seeing its business attacked from all sides. Challenger banks, like TymeBank, and internet-only banks like Bank Zero are using the latest technology and a virtual presence to deliver banking services to consumers – especially younger consumers – faster, easier and at lower cost. Traditional banks’ physical branch networks, high staff numbers and legacy technology all now seem less of an asset and more of a millstone with every passing year.

Luring customers away

And it’s not just new banks that ‘old’ banks need to contend with. Technology companies are eyeing the profitable parts of banks business that are less heavily regulated, and trying to lure consumers away. Insurance and online payments are ripe for the taking. Mobile phone companies are included in this, and firms such as Vodacom have incredibly high consumer penetration rates – its ‘Super App’ opens the door to more-and-more financial-type services, all delivered seamlessly from your smartphone. In fact, it is the emergence of the smart phone more than anything that is the gamechanger, with its ability to allow payments and make cash largely redundant.

Facebook is so keen on being a larger part of consumers’ life (and wallet) that it has reinvented itself as Meta. Banking-type services could easily be incorporated into the ‘metaverse’ and further undermine banks’ relevance. As technology firms amass ever more information on consumers’ behaviour, they will know more about what services they might need, when they need them, and be able to target them through the power of their mega apps. (Instagram etc.) It’s hard to see how banks can compete with the ‘always on’ level of connection that ‘GAFAM’ enjoys. (Google, Apple, Facebook, Amazon, and Microsoft.)

Regulator protection

To a point, banks have only themselves to blame. When the only competitors they had were other traditional banks they did little to modernize.  Although banks are respected, loyalty to them is generally low. That said, switching banks is (one assumes deliberately) a time-consuming chore, and taking up to five days to clear a payment is just one example of the cozy life banks once enjoyed, often at the consumers’ expense (and annoyance). For the time being, core banking services (transaction accounts, mortgages and loans) remain heavily regulated, and bring with them onerous capital and reserve requirements that are, at present, unattractive to non-banks. But as Bob Dylan said, the times they are a changin’, and traditional banks can’t rely on the regulator’s goodwill to protect them from new market entrants. At the moment non-banks are targeting primarily consumers. When they turn their sights to the lucrative corporate world traditional banks will have a real reason to worry…

A period of reinvention is needed

With so many disruptive influences impacting the market, the world of banking is set for long term and fundamental change. Like King Canute being unable to hold back the tide, it’s hard to see how banks can prevent a hollowing out of their range of services. But that ought not mean the end of traditional banks as we know them. Banks provide an essential service and have a deep pool of expertise. Their brands are still household names and respected, and this has a real value when it comes to looking after savings and investments. The technical onslaught they are facing should be a painful wake-up call for the industry. In order to survive and thrive in the new era banks need to fight-fire-with-fire, by investing heavily in new consumer-friendly technologies, while at the same time sweeping away some of their outdated practices. Whereas once it was the banks that were in charge – now the Consumer is King.