Microsoft Chairman Bill Gates shook the world (once again) when he called banks “dinosaurs” and that they could be bypassed. Did he say this recently? Nope. He said it over 25 years ago. Did his prediction come to pass?
To find out, let’s study the studies . Spoiler alert: the answer is not as black and white as you may assume. As fintech continues to be embraced by younger generations, traditional banks realize that they are stuck in quicksand.
Their lag in the use of digital has a major impact on customer loyalty (50 percent) and revenue growth (51 percent). Financial firms cite significant barriers, including an inability to experiment quickly (56 percent), legacy systems and processes (55 percent), and change management (41 percent).
This study reports that many financial services firms are actively embracing digital, but only a minority (20 percent) believe they are utilizing these technologies successfully. Only 15 percent believe that they are optimizing end-to-end customer experiences.
Only seven percent of bank credit products can be handled digitally from soup to nuts, according to a recent analysis by Bain and SAP. This does not sit well with most small-to-medium enterprises (SMEs) looking for financing.
In fact, 56 percent of SMEs want better digital banking tools, according to Javelin Research. Over 60 percent of small business owners prefer to apply for loans entirely online.
What we have here is a David vs. Goliath showdown.
The Fintech That Gets Noticed
The Fintech that usually gets the most attention (and the most investment money) are the ones that are specifically designed to be a threat to traditional banks.
The hope is that these startups can bring more flexible and faster service, and make traditional banking a more acceptable and even enjoyable experience emphasis on the word “experience.” It’s a word that Millennials swear by.
The term—and it’s a term we hear a lot —is disruption. A revolution like this opens up competition and turns heads toward the easiest, most dynamic, and most rewarding ways to bank.
The Fintech Capitals of the World
North America produces the most fintech startups (thank Silicon Valley), with Asia, particularly China, coming in at a close second. Singapore is another major player in Asia and on the global stage, thanks to tax benefits, government assistance and access to regional markets.
Bye Bye Banks?
Gartner, a global research and advisory firm, predicts that, within 12 years’ time, 80 percent of financial firms will either go out of business or be rendered irrelevant by new competition, customer behavior and advances in technology.
Instead, “heritage financial firms” will exist only formally but not competing in the traditional way. Gartner vice president David Furlonger says that traditional banks face a risk of failure if they continue to maintain 20th century business and operating models.
Don’t Write Off Banks Just Yet
Hold on, though. Let’s not bow our heads and hum a funeral dirge for banks prematurely. Since Bill Gates made that dinosaur prediction in July 1994, bank earnings have quadrupled and equity capital has quintupled, according to FDIC.gov.
Meanwhile, branch and employee growth has been small compared to revenue growth, which actually makes traditional banks tighter and leaner. Bank industry earnings in the first quarter of 2018 were at an all time high, totalling over $50 billion . Another huge advantage the traditional banks still have over fintech: lots of customers (for now).
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Fintech As Disruptor
Still, it’s no time for traditional banks to coast on their historic reputation. For quite some time now, Fintech has been chipping away at the formerly sturdy foundation of traditional banks.
Mobile banking, artificial intelligence and other tech tools are leading the disruption parade. Investors are taking notice and putting their money where their mouth is: from 2011 to 2015 alone, investment in fintech has grown nearly eightfold .
Finnews.com reports that, in the first half of 2018, the global fintech industry attracted $58 billion in financing. It cites Germany’s Wirecard as now being worth more than Deutsche Bank.
The advantage for fintech: a system free of legacies that can offer their services at half the price of traditional banks, according to a study by Morgan Stanley.
The report concludes that banks will have to reinvent and disrupt themselves to keep up. In particular, traditional banks in Europe are vulnerable due to years of super-low interest rates.
Fintechs Vs. Traditional Banks Vs. The Generational Divide
Younger generations are going to lead the charge, as always. Research reveals that Gen Y is “frustrated with the outdated nature of financial systems;” Millennials are generally turned off by banks because they don’t offer “appealing products and services.”
A FICO survey of Millennials shows that the lack of a mobile banking app as the main barrier to engaging with a bank; Millennials are also three times more likely than other generations to manage their bank account through a mobile device.
Sixty-eight percent of Millennials say that in five years, the way we access our money will be totally different.
The Rise of Cryptocurrency
Even the way we handle money is going to evolve, making the very reasons for banks’ existence to be called into question. According to The Harvard Business Review, cryptocurrency like Bitcoin will not necessarily replace traditional currency (even the U.S. dollar is used as e-currency), but that doesn’t mean that new technologies like this won’t cause some serious disruption to traditional banking.
If you think about it, cryptocurrency is already sort of a regular thing: we use less physical cash less often. We’re already transferring digital code for goods and services. SoFi can help you get started buying and selling cryptocurrency via the SoFi Invest.
Cryptocurrencies go beyond just being digital currencies; many forms of crypto operate as self-contained systems that don’t depend on the oversight of a bank or central authority.
Although traditional banks provide similar services (electronic transfers and online payment, for instance), they are no match for a new system that can bypass a central bank authority and work with numerous currencies in real-time without drag or delay from approval or confirmation processes.
The Latest Fintech Trends
In addition to cryptocurrency, the top fintech trends recently reported by Forbes include:
• Digital-only banks. Influenced by mobile banking, banks with no brick-and-mortar branches are increasing in popularity and acceptance, particularly popular among Millennials. Phone apps allow for money management while on the go. As a result, bank visits to branches are expected to drop in the future.
• Artificial intelligence (AI). AI tech can automate data analysis, saving time, money and drudgery. It’s also used to create chatbots to assist in customer service and robo-advisors to help with investing. AI can also help detect fraud by monitoring patterns of customer behavior.
• Biometric technologies. A system used to prevent cyber attacks, as well as helping to make logging in to an app easier and faster.
Fintech Rising In Developing Countries
In the third world, not everybody has access to a bank account or a traditional banking system. As an alternative option example, East Africa , mobile phone companies allow customers to transfer cash-convertible phone credits to each other.
These phone credits act as a digital medium of exchange — the payment structure and its support fintech is the mobile phone network itself.
Traditional Banks Are Seeing The Future and Feeling The Pain
Traditional financial services are paying close attention; they’re seeing the changes approach closer. A 2018 executive survey found that nearly 80 percent of higher-ups feared that their firms were at risk of disruption and displacement from fintech. Three quarters of those respondents represented some of the largest financial services in the business.
Consumers, especially younger ones, are expecting more technology and personalization when it comes to their financial services. A growing group of entrepreneurs and startups are answering the call.
How Traditional Banks Are Responding
Of course, traditional banks got with the program at least on a basic level. They know to offer mobile apps, electronic bill payment and online services. They’re also experimenting with fintech such as voice adaption to pay bills and to make transfers. The challenge remains in keeping these programs safe, fresh, and user friendly.
At least for now, banks retain the advantage of recognizable brands and large customer bases, particularly older clients who have grown up doing business with human tellers in brick-and-mortar locations.
What they still haven’t completely mastered are faster transaction times, lower costs and a better customer experience.
They also have to go a long way to earn back trust thanks to the hangover of the financial crisis of a decade ago, which even younger people still remember.
The Great Recession has left many people of all generations with a distrust of traditional banks, which occurred at the same time when more people were becoming tech savvy and connected.
The Need for The Best of Both Fintech and Traditional Banks
The comparison may be apples and oranges, but the solution may be more of a mix of old and new. The University of Pennsylvania’s Knowledge blog considers a blend of physical and virtual touchpoints:
“People want to know that banks are nearby and part of the community. Defunct online banks such as Wingspan and ING Direct, now Capital One 360, didn’t scale without the brick-and-mortar element, much like Amazon, the e-commerce giant, now sees the need for physical presence with the roll-out of lockers, pick-up points, and even Amazon Go stores.”
Traditional Banks Are Keeping More of Your Money
While traditional banks continue to attempt to adjust to the digital age, they’re certainly not giving us a break for our patience in the meantime. We thought we had a deal with traditional banks: they were supposed to pay us (interest) for the privilege of letting them use our money.
Have you seen most banks’ interest rate offerings lately? It may be better to keep your money under your mattress. The average checking account interest rate is 0.06% while average savings account rate is .09%.
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