Banks are trying to work out what to do about the onslaught of fintech startups and Big Tech disruptors looking to steal their lunch. Often there is despair at incumbent banks that strict regulatory requirements keep them from being as nimble as the upstarts.
But regulatory requirements could, in fact, be banks’ biggest strength in the digital battle, turning them into marketplaces that enable all the other transactions.
It is all about leveraging the power of knowing your customer.
First, some context. Our lives effectively revolve around three ecosystems – a social media layer (Facebook, LinkedIn, Instagram); a multi or single product marketplace layer (Amazon, Uber); and a financial wealth layer (banks, insurers, asset managers). Each of these layers has various levels of cybersecurity embedded – some better than others, of course – and these range from customer authentication, data quality, and importantly, user financial information. Layers that are all at risk of fraud, and which have all been penetrated and attacked at some juncture.
Our lives revolve around three ecosystems – a social media layer, a product marketplace layer and financial wealth layer.
Banks, as the largest player in this wealth layer, have arguably done the most to solve for these issues. But the most difficult and expensive challenge has been – thus far – the blurring of lines across each of these ecosystems. Product marketplaces, who have your payment details, can be accessed via social media. You can access your wealth layer via marketplaces. The lines have become jumbled and this presents a significant problem when it comes to protecting your identity and your financial data from the bad guys.
This is exacerbated by the fact that only players in the wealth layer are regulated via anti-money laundering, financial crime, and KYC rules. This means they are the ones who have to spend the most on technology solutions to protect their ecosystems. Social media and digital marketplaces have yet to be forced down this road.
Instead of being a burden though, this presents financial institutions a unique opportunity. To become themselves marketplaces, to reverse the dynamic and be a safer custodian of our digital identities. After all, they’ve already invested massive amounts to do just that.
At the point of becoming a customer, and throughout the lifetime of their relationship in fact, banks have to understand and know who you are. Like in no other industry they have to collect and authenticate the most critical credentials to prove you are who you say you are. They have to monitor transactions and stop corrupt activity. And they bring you into the bank based on the correct compliance standard in every country that you operate in. There are, therefore, benefits and positives for banks becoming platforms.
Be less boring
One major downside? Banking products are rather boring. If they want to really offer value and attract the kind of loyalty seen among the other layers, they need to find ways to bring aspects of the other layers in.
For instance, we’re currently speaking with a technology company that allows you (the consumer) to manage your monthly subscriptions and contracts inside your banking app. When you want to end a subscription, you simply press the Cancel button. No more trying to navigate complex cancellation processes, or jump through hoops with the individual vendors. When you want to switch a utility provider, as an example, you can just press Switch. All payments are managed on your behalf and all data is brought back. Similarly, if you want to sign up to services, the bank could onboard you all within the same app.
Banks move from being purveyors of financial products to being a platform.
Banks can further use such platforms to create mini marketplaces across their global networks — connecting their wholesale customers to their retail customers for the first time. Within the industry, American Express has adopted this approach. The Amex in-app loyalty tab, which allows users to select/deselect which offerings they want to apply to their card, helps keep users engaged and in-app with such a marketplace. This is not only advantageous to customers, who benefit from discounts and other exclusive offerings, but to wholesalers and retailers, who have an engaged market to sell to.
A trade bank could bring all of their corporate customers into one curated portal environment.
Beyond consumers, a trade bank could bring all of their corporate customers into one curated portal environment, allowing them to trade together. For example, you are based in Europe and buy raw material from an Asian company. You may not realise there is a European company that offers the same product, but cheaper to buy (after considering foreign exchange and logistics costs). If that bank facilitates an ecosystem and network, it is then able to create this marketplace with a better user experience and enhanced customer loyalty. Perhaps some actors receive lower FX fees or reduced levels of trade finance, but overall, it is a better transaction process.
The added benefit of employing this type of technology is that you start to store and protect the most important elements of a customer – their identity and their wealth. Banks move from being purveyors of just boring financial products to being marketplaces and a platform, and become custodians of critical pieces of your digital identity.
The above examples just touch the surface of the banks’ opportunities to better monetise their current customers, better amortise the massive cost of creating a clean and curated customer base, and digitally allow increasingly demanding customers to find value in what is currently seen as legacy financial institutions.