There are more than 4 billion Internet users in the world, among which are 3.2 billion social network users. In France there are 46 million Internet users, which represents 88.5% of the French population. With such numbers, it is not surprising that companies are digitizing to follow the trend. The digital revolution is based on the growing penetration of mobile phones and high-speed internet. This brings about a change in traditional practices: companies are integrating powerful CRM and cloud tools to store and analyse data.
Banking is amongst the sectors most affected by the digital transformation of businesses; we call it “digital banking”. This digital banking business model enables cost-effective earnings and saves time by automating repetitious and tedious tasks. This innovation is consisted of providing online banking services such as account consultation, transfers, savings management or checkbook ordering, etc.
Banks believe that the digital transformation will most likely result in a total dematerialization of financial products including means of payment. They anticipate a decline or even a disappearance of the use of products on physical media such as checks and bank cards. At the same time, mobile payment should be democratized.
Since the appointment of Yves Tyrode (former digital director of SNCF company) as Chief Digital Officer of BPCE, digital projects have played an important role with an investment intention of 750 million euros by 2020. The group wants to develop new tools that will enable customers to subscribe to banking products by themselves and simplify any request for credit. The group estimates that 40% of its sales will be made digital in 2020.
In which ways will banks further adapt their business model in response to the digital revolution?
Fintech proposed innovative payment services
The rise in power of technologies deeply modifies clients’ behaviors and expectations. This sociological and behavioral evolution translates into more and more demanding requirements in terms of immediacy and customer experience. Nowadays, searching information and comparing offers has become a systematic reflex for the consumers who want to be more autonomous.
In response to this demand, the fintech are at the heart of the innovations of tomorrow. Fintech is defined as “technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services”.
There are several types of Fintech:
- B to C: aims at the general public; it is 100% digital banks, without agencies, which offers competitive rates, online pools (Leetchi), payment applications (Lydia) or wealth management tools (Grisbee) or automated investment (robo-advisors).
- B to B: offers financial services (online currency transfer, dematerialized factoring) to companies, SMEs or large accounts.
- B to B to C: crowdfunding platform that connects project leaders, creators, SMEs and investors (individuals or professionals).
The highest number of fintech service providers are in the payments, clearing and settlement category, followed by credit, deposit and capital-raising services. Fintech firms currently represent a relatively small portion of the global banking services market. Whether new entrants could potentially take a significant share of more developed banking markets and thus challenge incumbent banks remains an open question.
Innovative payment services are one of the most prominent and widespread fintech developments across regions. Payments processing is a fundamental banking operation activity. There are many different operational models and players and these models and structures have evolved over time. Recent advances in technological capabilities, such as in the area of instant payment, have accelerated this evolution. Differences in types of models, technology employed, product features and regulatory frameworks in different jurisdictions pose different risks. The adoption by consumers and banks of mobile wallets developed by third–party technology companies – for example, Apple Pay, Samsung Pay and Android Pay – is an example of the distributed bank scenario. Whereas some banks have developed mobile wallets in-house, others offer third-party developed wallets, given widespread customer adoption of these formats. While the bank continues to own the financial element of the customer relationship, it cedes control over the digital wallet experience and, in some cases, must share a portion of the transaction revenue facilitated through the third-party wallets.
The evolution of the business model of banks
In the field of finance, competition is increasingly fierce due to the extension of the free model on payment methods. This extends to brokerage services and more generally on banking services called “banking uberisation”.
Faced with these new assets, banks are showing a greater orientation towards innovation. Institutional strategies can be significantly different: some players prefer to buy source codes and technologies rather than become innovative players themselves. Others will deploy an open innovation policy that results in a multiplication of commercial or technological partnerships, participation in venture capital funds and the launching of incubators or accelerators.
This leads retail banks to review their marketing strategy and pricing policies. In fact, marketing today depends heavily on new digital uses (online advertising, social networks) and the increasing use of data. The business model of banks is also undergoing changes because they believe that agencies remain essential to establishing a sustainable model of profitability. This involves the reorganization of their branch networks and their administrative centers as well as the reinforcement of remote relations centers for the development of specific expertise. The investments of equipment agencies and employees are an important point: buying tablets, smartphones and Wi-Fi terminals. However, while digitization-related investments are now significant for retail banking businesses, they are generally less important for institutional banking. In institutional banking activities, digital uses could gradually accentuate the distinction between high value-added services (M&A, capital issuance and debt issuance) and vanilla services (such as currency trading) that will build more and more on digital platforms and automated processes. For the securities and brokerage trades, order processing tends to be free thanks to the new technologies.
It also calls for the deployment of human resources policies to face new challenges. Some employees need to retrain. It is necessary to increase the skills of other employees and must be successful in recruiting high-profile employees such as computer scientists, data experts and specialists in customer experience.
Digital transformation presents threats and opportunities
Digital transformation is a topic at the heart of financial news. It discusses risks and opportunities. It should be noted that it is a result of other structural changes in the banking sector. In the twentieth century, industrialization led to the computerization of banking operations by setting up cash machine, the dematerialization securities and checks and the invention of the smart card. The phenomenon of globalization has enabled the interconnection of markets as well as the opening to new markets in Eastern Europe, Africa and Asia. The need for adaptation and innovation is therefore not new, but financial institutions admit that the changes brought about by the digital revolution are faster than the previous structural changes. The stakes are high because the digital transformation, which involves new players is more unpredictable, decentralized and faster; therefore, it calls for greater agility.
The challenge of digital transformation is particularly important for the retail banking sector for individual customers: security, authentication and customer compliance issues occupy a prominent place.
Impact on consumer sector:
- Threats: date privacy, data security (protection), discontinuity of banking services, inappropriate marketing practices.
- Opportunities: financial inclusion (expanding access to financial services which can result in an enhanced customer experience by providing a better understanding of products and terms), better and more tailored banking services (provide white-label robo-advisors to help customers navigate the investment world and create a better and tailored customer experience. Partnerships with fintech companies could also increase the efficiency of incumbent businesses), lower transaction costs and faster banking services.
Impact on banks and banking system:
- Threats : strategic and profitability risks (due to a lack of anticipation and agility), cyber-risk (interconnectivity between market players can amplify cyber-risk, actors or sectors not subject to equivalent regulatory expectations could potentially make the banking system more vulnerable to cyber-threats), increased interconnectivity between financial parties, high operational risk (more interdependencies between market players (banks, fintech and others) and market infrastructures, which could cause an IT risk event to escalate into a systemic crisis, particularly where services are concentrated in one or a few dominant players), compliance risk including failure to protect consumer and data protection regulation (more outsourcing due to tie-ups with fintech firms, and the associated competition for ownership of the customer relationship), threat of a loss of the customer link to the benefit of new intermediaries (if these new players managed to conquer the customer relationship, the financial actors could then be relegated to their product design and risk management functions), money laundering – terrorism financing risk – liquidity risk and volatility of bank funding sources. The use of new technology and aggregators creates opportunities for customers to automatically change between different savings accounts or mutual funds to obtain a better return. While this can increase efficiency, it can also affect customer loyalty and increase the volatility of deposits.
- Opportunities: improved and more efficient banking processes (safer environment thanks to the use of cryptographic or biometric technologies which decreases the chances of failure), innovative use of data for marketing and risk management purposes, potential positive impact on financial stability due to increasing competition (could eventually fragmentize the banking services market and reduce the systemic risk associated with players of systemic size), regtech (use of innovative technologies to pursue regulatory objectives, prudential requirements including reporting, consumer protection, etc). In this context, regtech may provide banks with more effective ways to improve their compliance and risk management.
Digital transformation is also creating opportunities for commercial banks in customer relations. With economies of scale, banks could be able to serve a larger customer base while improving their operational efficiency. This decrease in operating costs from the growing autonomy of the customer, the decrease in structural costs and the overall improvement in operational efficiency (industrialization, robotization, performance of artificial intelligence algorithms), together could compensate for the rise in IT costs resulting from the increase in digital uses, development costs and server availability requirements. This digital transformation would then simplify and reduce customer service queues. For private banks, their services could be democratized to sections of the population that have not yet had access, thanks to the automation of the consultation.
The digitization of banks is part of the digital transformation of our societies. This transformation responds to a need for instantaneity and autonomy of consumers. Many innovative players have appeared as Fintechs to meet this need. While digitization of banks has many advantages in terms of profitability and efficiency, banks must become aware of the risks in terms of data protection. Faced with these risks, new technologies can also offer interesting answers such as “Regtech” solutions. The challenge will be to identify the most promising innovations in the offerings and succeed in moving from experimentation to industrialization.
SAB, “Digital banking: a real innovation for banks”, 2018, https://www.sab2i.com/ref/digital-banking.html
Banqueenligne.org, “Digitization: transformation of banks”, 2018, https://www.banquesenligne.org/transformation-digitale-numerique-banque/
Nathalie BEAUDEMOULIN, Pierre BIENVENU and Didier WARZEE, “Study on the digital revolution in the French banking sector”, 2018, <https://acpr.banque-france.fr/sites/default/files/medias/documents/as_88_etude_revolution_numerique_secteur_bancaire_francais.pdf>
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