Will Industry Progress and Innovation Be The Downfall Of Big Bank

Part 2 of "Are banks too big to scale"

While changes in payments trends from consumers are placing increasing strain upon large, traditional bank systems, they aren’t the only force altering transaction and data volumes. The European PSD2 regulation requires banks to adhere to standardised changes intended to improve the industry, bringing significant, unavoidable adjustments to an industry infamous for being stationary and resistant to change. The PSD2’s focus on the role of AISP’s and PISP’s will drive both interaction and transaction as well as competition, and the direct connection between banks and retailers through use of APIs will lead to innovation and new opportunities. Banks are beginning to realise the use of APIs affords a chance to create a larger ecosystem of value for their customers, with some venturing to offer innovative third party apps through their own marketplace. This concept is already underway in BBVA’s API market, and is likely to become a popular means of adding value for customers, as well as boosting transactions and interactions. The implementations of PSD2 requirements provides banks with an excellent opportunity to innovate and differentiate themselves from competitors; a particularly vital opportunity for bigger banks threatened by digital competitors offering speed and ease-of-access they cannot match. When also considering the influx of new banks entering the market, with 30 new banking licences in process, leveraging the opportunities the PSD2 offers could be essential to survival, but there are concerns surrounding big banks’ ability to do so. Large, rigid legacy systems may hinder traditional banks from taking advantage of these opportunities, while digital and smaller scale banks with more flexible systems facing less risk have the infrastructure to cope with these changes, able to leverage them to offer a superior service.

Banking differentiation is not solely limited to opportunities created outside the bank, but is also stemming from within the bank through increasing service functionality, with offerings in personal finance management. Offering tools to help customers remain mindful of their budgets and goals boosts bank transactions as the bank becomes a more valuable source of knowledge for the customer. Similarly, Neo Banks are going one step further with offerings including expense tracking and invoice issuing, also adding to volume of interactions. While Neo Banks are unlikely to find this boost in interactions problematic, operating on newer, simpler systems designed for a digital future, traditional big banks are of such a scale that further strain on cumbersome, siloed infrastructure could prevent them from offering products to compete with smaller competitors, thus giving innovative newcomers an advantage.

Evidently, the ever-increasing volume of transactions, the growing preference for digital channels, the changes brought about by PSD2 and the infinite possibilities of IoT will all place considerable strain on the architecture of big banks, relying on systems implemented decades earlier and unable to keep up with the pace of changing customer needs. Many banks considered to be “too big” continue to operate on aging legacy systems, plagued with data silo issues and pulling time and resources away from investment in new technology able to operate in this new digital landscape. Despite awareness that these systems are hindering banks’ potential and growth, with 86% of banks citing legacy technology data silos as their biggest internal challenge[1], the risk, time and scope of implementing a new core system for such large banks is a serious concern. However, the ease with which influential technology companies such as Google are able to scale due to their single data view origins, growing from 10,000 search queries per day in its infancy to the colossal 3.5 billion per day it handles today[2], is reflected in the ability of digital fintechs banks to expand with minimal issues, due to being data-focused and unaffected by the limitations of siloed systems. As a result, the ongoing struggle encountered by traditional banks to make use of their data and effectively manage the growing scale of data and transactions, is an unavoidable problem in a market gaining a steady influx of younger, more agile competitors, firmly focused on the changing direction of banking needs and processes. Banks that are “too big to scale” will inevitably lose out to fintechs and incumbent competitors able to offer a service more aligned with the requirements of today’s, and tomorrow’s, customer.

[1] http://www.mobilepaymentstoday.com/news/study-global-digital-payment-transactions-set-to-reach-10-growth-for-first-time/

[2] http://thefinanser.com/2016/10/internet-giants-competition-banks-ready-compete.html/