How banks can engage, expand and innovate with new market entrants?

Post financial crisis, FS institutes are mainly focusing on improving cost income ratio (reduce cost base), leverage ratios (improve quality of assets and comply with regulations) and return on equity (improve profitability).

While banks were busy running a tight ship, there is a parallel ecosystem of fintech and other startups came along and started disrupt every part of the banking value chain, starting from Core banking processes like KYC, settlement & reconciliation, payments etc to core products and services like P2P lending, retail investments etc.

Moreover, in recent times Fintech’s are beginning to get into the space of services like personal finance management, loyalty management, engage in hybrid business models with retailers, telecom providers and utility service providers to participate into larger consumer spending ecosystem. While its small now, but in near future it will impact banks ability to participate and influence things which matter most to individuals.  

With initiatives like open banking and PSD2 in the corner (early 2018), banks need to quickly decide its strategy of not only complying to the regulation but also how they can use this opportunity to be the leader in the upstream services.

Below are the opportunities across the payment value chain for banks, where collaboration with Fintech’s will accelerate innovation, expand ecosystem and most importantly improve ROE and CI ratio.  

• Core banking processes - Clearing & settlement, Reconciliation

Clearing and settlements subjected to counter party risks. T+2, T+3 settlements also means firms have to model all assets available at future point to optimize collateral management. Blockchain based solution could take away complexities around process and human interactions. NASDAQ and R3 have already taken steps to issue share to private investor using Blockchain technology. Australian equity market is investing on simplifying and seeding up post-trade processing using blockchain. Banks can invest in open source smart contract projects like Ethereum, Codius, Eris etc or work with firms like Mirror, Digital Asset holdings etc to expedite the process improvement.

• Network & Schemes - Mobile Wireless Payment System, tokenization of assets

Banks are still using legacy financial rails to move money. It has been topic of big debate for few years. Mobile money (Safaricom) is a popular concept to provide financial inclusion for the low-income masses. This is efficiently backed up by alternate distribution and collection networks, which reduces leakage and improve SLA. Collaboration with Telecom is a logical way to reach out to the next billion people and bring them under financial ecosystem.

The financial networks and schemes to move money is still very inefficient across the world. Blockchain can tokenize any asset and help them move around efficiently. Ripple for example signed up multiple banks to do real time cross border payment and settlements through distributed ledger technology. This gives an opportunity for banks to work with regulators (FCA etc.) and firms like Ripple and scale the model.

• Financial products - P2P/alternate lending, Crowdfunding, Remittance, Retail investment

Post financial crisis, financial institutions were unwilling to provide credit to individuals and small businesses with low credit ratings. This gave rise to many alternate players. Zopa, Funding Circle, lending club etc are some of the key P2P players in this market. Similarly, OnDeck, Wonga.com, Kabbage are some of the alternate lending players. In lending, bank can leverage capabilities to create credit scoring mechanism using social/mobile and other public data.

Crowdfunding is also getting diversified into donations (banktothefuture, crowdbnk etc), debt funding (buzzbnk, trillionfund etc) equity funding (crowdcube, crowdmission) and property mortgage (lendinvest) projects. In crowdfunding, banks should look to identify the small investors and engage them in better causes in the society and earn some good will.

Similarly exchange rates are very high for remittance in traditional banks and organizations like transferwise, Xoom, currencyfair are driving away commission based revenue.

And finally banks could easily collaborate with alternate investment vehicles like motif (invest in asset classes like cybersecurity, cloud computing or even 3-D printing), Robinhood (lower commission for investment in publicly traded companies and exchange-traded funds), Kapitall (gamifying the stock trading experiencing) which are taking away deposits.

• Payment origination

Payment origination is red hot space for few years. Many innovations like PayPal, Square, contact less cards, Mobile wallet (apple pay, google pay), health band, ring and car keys based payments are disrupting the market.

In fact it has not stopped here, some startups are trying to consolidate the card experience into single intelligent card and giving ability to use right card at the point of sales (Stratos, Swyp, and Plastc).

User experience and interchange fee’s from acquirer’s will be key area of focus as we move into future and banks should collaborate with new entrants to protect their fee based income.

• Advisory, ecosystem based services

Finally, banks’ ability to participate in a larger ecosystem going to be key for driving next generation business models and products and services. Specially with PSD2 and Open banking regulation round the corner, focus will be how to collaborate better and participate in services like Bank Aggregation, loyalty & rewards, Social/chat payments, personal finance, Tracking & Negotiation – Travel & leisure, utility etc. Banks will be forced to open up customers account and payments information details through API’s. In personal finance space players like Mint.com, Paymoolah, BillGuard, nutmeg etc are becoming the new financial advisors. Many rewards and loyalty players like Bink, Swipii, Loyyal etc coming up to provide better value for loyalty. WhatsApp integrated payment into their chat platform. This space will see a significant disruption in near future let by blockchain, cognitive, AI, RPA and API technologies. Banks can explore partnership with technology startups as well as large ecosystem players (telecom, Utility, hospitality etc) to emerge as winner.