It’s no secret that like other industries, the banking sector has felt the effects of technology shaking its foundations. And to its credit, most institutions have attempted to respond. Almost every branch has rolled out its own platform for online and mobile banking to serve the needs of a convenience-conscious consumer. Mobile deposits, digital transfers of money, and user-empowering apps have all helped to improve the interaction between the customers and their bank, bringing a traditional industry into a new age.
One of the behind the scenes initiatives that is taking off is the increasing integration of AI with the use of robo-advisors that offer automated, algorithm-driven financial advice and services (if you want to learn more about this I recommend checking out Joon’s blog post). Banks realized that technological advancements were not only disrupting the industries they might be investing in but could also potentially unseat them from their established thrones.
But Has It Been Enough?
Traditional players like Bank of America and Wells Fargo have seen the rewards of adopting a new technological strategy as digital growth has become a big influence on their bottom line. Bank of America added over 1 million digital users this past third quarter, mostly mobile, while also cutting traditional channels of cost. Building a strong, user-friendly platform has helped the major players retain current customers and even win over new ones.
And robo-advisors have had some success, attracting not only mass-market individuals (with net worths of $50,000 to $200,000 each) but also extremely affluent clients as well. However, a study conducted by Northwestern Mutual found that there is still a large share, about 68%, of U.S. adults that don’t receive any professional financial advice. This failure to increase market penetration with robo-advisors is largely attributed to established banks being reluctant to cut into the profits of their already established wealth management services and a lack of trust by consumers. This is a big obstacle for growth especially since it is estimated that by 2030, U.S. households will have $64 trillion in investable assets. That is a potential of $150-240 billion to be earned in revenue by wealth management services! However, if banks can’t find a way to capture those underserved potential customers they could lose out on all that business.
Enter the Newbies
This gap between the needs of consumers and traditional banks’ abilities to use technology to meet them has left an opening for creative startups to gain traction. One example of a company that has entered the market is Simple. Simple, started by Shamir Karkal and Josh Reich out of frustration with the banking sector’s old ways and outrageous fees, is the “millennial approach to banking.” Named by Business Insider as a startup to watch in 2017, Simple’s model is a completely mobile platform that utilizes fee-free ATMs inside places like convenience and drug stores. In fact, Simple streamlined their services to be as transparent as possible, something highly valued by millennials, and cut down on all kinds of traditional fees. Instead, they make their profits by splitting interest margins with a partner bank and splitting the service fee on debit-card purchases. Simple’s approach seems to be working as they experienced 43% growth in just 6 months in 2016. The founders attribute this success to their mission of revolutionizing the way people bank, saying “If you build a process people like, people will use it.”
Enter the Powerhouses
Also potentially engaged in this “technology arms race” in banking are some of the biggest powerhouses in tech: Apple, Facebook, Google, and Amazon. Already experimenting in the mobile payments market, these companies have the potential to make the leap into some of the traditional financial services offered by banks. Some of the major advantages for a company like Amazon include their reputation and resources. Recognized in 2017 by the Harris Poll Reputation Quotient as “the most reputable brand of America’s 100 most visible companies” and with over 80 million Prime subscribers, Amazon already has a loyal customer base that it can tap into. With all the data the company has already collected on everyone who uses their products and services and the multiple touch points through which Amazon interacts with these consumers, imagine the personalization and convenience it can offer. Banking and receiving financial advice could be made as easy as going on Amazon’s website or talking to Alexa. Amazon also has the unique opportunity to service the over 100,000 vendors using its platform. Since it has already built trusting relationships with these small businesses and their owners it will be easier to sell financial services to them as well.
To win over the banking sector is really not only a race against time but a test of different digital business strategies. Who will win our loyalty and money: traditional banks integrating technology into their already established practices, startups reimagining how banking should function, or technology companies with the resources to expand to new areas?