Disruption instead of evolution: banking over the coming years

Just last week John Cryan, head of Deutsche Bank, announced another large-scale series of redundancies. The entire banking sector is undergoing a period of radical change. Digitisation is a significant factor. What effects will it have over the next few years and what strategies can institutions put in place in order to emerge from this phase stronger than before?

What do photographic film, hard-copy encyclopedias and video shops have in common? No one needs them anymore. People haven’t stopped taking photographs – quite the opposite. We still eagerly look up information when we want to know something, and get through whole series. We do everything we did before – but completely differently. This is why, in a 2016 Study, McKinsey & Company predicts that almost half of all German banking customers will open a bank account digitally in 2020. Worldwide, more than 12,000 fintech companies have set out to digitise banking. In doing so they are quickly creating a “new normal” which established institutions are also measured against.

Revenue loss due to new players

Banks have scarcely any time left for digital transformation. On the contrary, there are many more disruptive changes to their business. At worst, according to estimates by McKinsey & Company, they could lose up to 40 percent of their revenue to new players through customer migration and shrinking margins. Almost 90 percent of respondents in the PWC Global Fintech Report 2017 fear having to lose market share to pure fintech companies. They primarily see risks to their revenue in the areas of payment (84 percent), electronic payments (68 percent) and personal finance (60 percent).

On the other hand, McKinsey&Company believes that “In contrast, if banks could digitally transform their entire value creation chain themselves, in an ideal scenario they could increase their revenue by as much as 50 percent.” Well-known institutions are taking this route, either by investing in startups on the fintech scene or in their own technology. Forbes is reporting that BNP Paribas plans to double its technology investments over the next three years in order to meet changing customer expectations and reduce costs.

Banks are becoming self-disruptors

In the PWC report, a clear majority (56 percent) report that they want to put disruption at the heart of their strategy. They use fintech companies as a guide and are planning radical restructures of their business. To avoid losing their customers to (pure) fintech companies, the “self-disruptors” in several sectors – from payment functions and banking to wealth management – are focusing primarily on user-friendly and intuitive product design. It is no coincidence that PWC quotes the head of IT at a bank in the Asia-Pacific region: “We concentrate on the customers and on serving them as well as we can. If that means we need to make radical changes to our processes, so be it.”

It may not be so easy for institutions in developed industrial countries to flip the switch. Highly complex old systems do not become agile digital speedboats overnight. This is why many companies are looking to team up with the new players in order to get involved in the open ecosystems that they have created and to implement innovation. Almost 60 percent of Swiss institutions surveyed by PWC said that they are already working with fintech companies, and over 80 percent want to do so in the next three to five years. In Germany, the proportion increases from 70 to 78 percent.

Both sides benefit from partnerships

It appears that banks are edging closer to fintech companies. On the other hand, fintechs are also integrating themselves into banking structures. This is extremely promising for both sides because there are very few fintech companies in a position to offer the full range of traditional banking services. According to McKinsey & Company, around a quarter of technology companies only offer payment services. Otherwise, they are mostly involved in private banking. Through partnerships with experienced financial institutions, they could obtain access to valuable expertise when it comes to business customers.

Their large customer base and huge datasets make partnerships with established banks beneficial for fintech companies, and these banks’ strong brand image can also act as a route into different customer segments. The next few years will show how these collaborations look in detail. The technological foundations are already there, with open platforms like our Digital Banking Hub. API-based architecture allows any conceivable solution to be combined and integrated into the core banking system.

You can find out what opportunities are currently available to you here.