For every new patient diagnosed with COVID-19, there are 1 or 2 new articles on the web talking about how the “new normal” will be like. Firstly, the concept of “new normality” is contradictory (normal refers to something usual, new refers to something unseen, ergo unusual). Secondly, many of these analyses start from a circumstantial vision, and from what is visible, when a medium-serious analysis should consider not only conjunctural aspects but fundamentally structural ones.
The present text, therefore, aims to offer the reader a strategic review of what is to come in the financial industry as a result of the crisis resulting from the new coronavirus outbreak, but on the understanding that COVID-19 has only accelerated and catalyzed some previous structural trends that were appearing in that industry. This analysis could have several dimensions, but we will focus on the aspects related to the strategic scenario of the financial industry which is a scenario highly mediated by technology, and understanding that it is an industry that before the arrival of the new coronavirus, was already suffering structural stress due to the siege of the so-called “fintech”.
That’s why it’s better to talk about the financial industry 4.0 instead of “financial industry” because the financial industry as such was being transformed into a new version of itself, a much more digital version, much more complex, much more eco-systemic, much more distributed version.
Trends in the Global Financial Industry before and after COVID-19. (In relation to technology)
Trend I. Digitalization of the relationship with the client.
Previous trend: This is a structural trend that was due to a global trend; the digitalization of economic and social interactions as a result of the digital revolution, and so gradually banks since the middle of the first decade of the 21st century began to offer their services in and through the Internet, first through the Web and then in mobile applications. Today, there is no traditional financial institution in the world that does not have a portal and/or an application to offer their services to their clients with its client. How effective and efficient this endeavor has been in order to offer to the digital client a seamless, safe, and easy to operate digital experience, is the subject of another analysis. Suffice it to say that despite the impressive advances in UX, and with few exceptions, traditional banking still has a lot of debt with its digital customer in terms of the quality of the digital experience. It should be noted that much of the digitalization of the customer relationship was an incursion of the banks into the digital world in order not to be left behind by other competitors, and we could say without too much doubt, most of the times this endeavor wasn’t strategic nor crucial to the banks.
Situation after Crisis; From “fashion” digitalization to “survival” digitalization. The digitalization of the relationship with the client will become a fundamental strategy of survival; in a recessive scenario, it is required to reduce costs (paradoxically, at almost any cost) and eliminate a good number of branches. If a digital bank could offer all the services a traditional bank does, it means that all the extra branches are almost unnecessary from the strategic point of view. Yes, this sounds too radical, but the economic situation the World confronts now is even more radical than that. Besides the discussion of the benefits for the bank, cost reduction resulting from digitization is not only beneficial for the incumbent financial operator but also, and primarily, for the financial customer and for the society as a whole. A customer who does not travel to the bank means less wasted man-hours, less vehicle traffic, less fuel, less pollution, less stress, better life which at the end of the day is the promise of technology.
There are many challenges that need a solution for total digitalization of the client relation, being the main problem competition; digitalization puts the bank in competition not with other banks, but with the offer of digital customer experience from the big technology platforms such as Facebook, Amazon, Google, etc. A “supreme” digital experience requires that the customer interaction platform be easy and secure to use and that it be in a constant process of innovation. Innovation that should preferably come from a Fintech ecosystem, associated or linked to the bank.
Added to the above is the need for governments and clients themselves to avoid unnecessary client crowding. It is not difficult then to visualize in the near future the banking regulatory agencies issuing regulations for the reduction of crowding in bank branches and perhaps even issuing regulations to reduce the number of physical agencies available.
Trend II. New players emerge from the technology field.
Before the COVID-9, the financial industry was suffering another structural trend: the emergence in the last decade of a new class of players that using technology as a main ingredient offer a variety of new dishes for financial clients. In addition, they offer superior digital experiences than banks at lower costs. These are the Fintech companies.
Regarding Fintech, many managers in the traditional financial industry maintain one of two mistaken paradigms: the first is that idyllic and romantic vision of the small garage start-up that wants to eat a piece of the bank’s pie. For these managers and directors of incumbent financial operators, these new operators are almost harmless. On the other hand, there are the pro-fintech enthusiasts who think it’s a matter of months before they see digital banks buying up traditional banks, and that is a matter of a couple of years before they see the industry totally broken, totally “airbnbinated”.
A closer and deeper look shows that both views are far from reality. Although the fintech industry launches new start-ups into the market every day, it is not necessarily an industry of small players. Shortly before the COVID-19 outbreak crisis in the Western hemisphere, Visa acquired Plaid for US$5.3 billion.
To have a better perspective, we suggest a fintech classification into two very different types; the first being firms that use technology to get a slice of the huge financial market, and the second type of Fintech are the large “Gargantuan” technology platforms of the Internet such as Amazon, Tencent, Alibaba, and others that, using their huge client base muscle and monstrous transaction volumes, have begun to make inroads into some markets and services. Such “forays” are not small; Ant Financial, Alibaba’s “financial” arm and holder of 53% of China’s online payments market, is valued at $150 billion.
While technology firms did not disrupt the global financial marketplace as it happened in other industries such as media, entertainment or tourism, Fintech did succeed in changing the strategic landscape of banking and insurance, creating a new financial industry operating model that is taking shape.
Subsequent situation: Despite the fact that thanks to the new virus crisis, the use of Fintech apps has grown by 72%, a large part of new Fintech ventures are experiencing a difficult situation in terms of obtaining financing; financing agreements for investment in Fintech have been falling for the last 8 months, and Venture Capital’s investment in Fintech is at the same levels as in 2017.
The large “techfin” or fintech companies coming from the bigtech companies related to huge e-commerce platforms will be ready to conquer important segments of the market now depopulated thanks to the bankruptcy of small incumbent financial operators and the difficulties of the fintech companies to take advantage of this situation.
In this chaotic scenario, a very good strategic option for fintech firms would be to create solid links and alliances with medium-sized traditional financial operators.
Trend III. Slow but consistent migration towards open banking.
Previous Situation: There is no need to explain at this point what open banking is, as long there are plenty of very good documents explaining this. Open banking is fundamentally a banking model where the bank opens its core data so that third parties can take advantage of it and generate new solutions and therefore new income streams. Open banking is not only a scheme that benefits new operators (fintech), but it also allows incumbent operators in the financial industry to generate disruptive and permanent innovation in an open, cheap, and efficient scheme.
Subsequent trend: Banks in their quest to become much more efficient will show an even greater need to accelerate open banking migration processes as a way to quickly reap the benefits of an open ecosystem of digital innovation and leverage banking data profitability with operators beyond the bank’s borders. And while this exercise will require efforts, the profit from this endeavor for banks broadly surpasses its costs.
Here a note is necessary; Open banking is not the final business model to which global banking will end up migrating in the medium term. It seems that Banking as a Service or BaaS will be the banking model to which the industry will migrate in the long term. A radical banking scheme that modifies the competitive scenario by turning the bank into a producer of financial services and where other (digital) firms are in charge of distributing and marketing those services. There is still a long way to go for BaaS in the world, but the path has already begun and there are several regulators committed to this model.