Who is going to eat the bank's lunch?

With agile entrepreneurs from Asia, exporting their digital business models to the rest of the world, Western banks will soon face fierce competition. We expect large, traditional firms to fall behind if they do not embrace digital innovations and watch out for competitor’s, especially from China. Any firm that wants to be a competitive provider of financial services for the next generation must now replace cumbersome strategic management practices.

Auguste Rodin’s sculpture The Thinker represents the philosophical and cultural movement during the late 19th and early 20th centuries in Western society. The development of modern industrial societies and the rapid growth of cities led to far-reaching transformations in the new economic, social, and political environment. Today the West is a fully industrialized world with many established businesses and it seems that China is about to enter post post-modernism era, where the digital transformation dissolves borders between organisations, countries, and cultures.

All upside down?

Goldman Sachs with a current valuation of US$70 billion and Ant Financial, the Chinese fintech from Alibaba Group, with an estimated valuation of US$150 billion give you an impression where the journey is going. Internet, tech, and social media firms are already the largest in the world, however, Apple, Amazon, Alphabet, Microsoft and Facebook are closely followed by Alibaba and Tencent. For unicorns, startups with a valuation over US$1 billion, among the largest are Ant Financial, Toutiao, Aliyun and Didi Chuxing. Latter a Chinese ride-hailing firm announced last week to offer health insurance and loans on its app. Credit and wealth management services will follow soon. Didi is just one of the many non-banks from China entering financial services.

Leverage digital platforms to enable consumers to access information and services related to every product offered across various industries and profit from the captured transaction data.

What are the new rules for economic competition?

The starting point of the rise of China was their admission into the World Trade Organization in 2001. Since then, China has been opening its economy, integrating into the global trading system and on top launched the One Belt, One Road initiative in 2013. This estimated US$5 trillion infrastructure project spans 70 countries across Asia, the Middle East, Europe, and Africa. It includes one third of the global GDP and one quarter of all goods and services the world moves. This new Silk Road will reshape global trade and boost wealth creation.

Though, over the last 16 years, Asian household assets have grown much faster than the global average, the per capita income in China is similar to the U.S. per capita income in the 1950s. Its population is not satisfied with the serving status as the factory of the world. The new middle class is well-educated, innovative, efficient, and willing to do more and they will do more.

With the support of their governments, business friendly regulations and a young population with an average age of 33 years, there are hundreds of millions of technology-savvy domestic consumers in China. Their excessive consumption and desire for riches are culturally determined, stemming from a communist regime. Supply and demand are balanced and a perfect match to further accelerate economic growth.

From health to wealth

Every day, Chinese firms can test their digital innovations with over 800 million internet users (double the number in the U.S. and Europe together). By applying machine learning these firms continuously learn from their clients. Hence, they can relate a health check at the hospital today with a meeting of a financial advisor the day after. As they anticipate life and succession plans, they can proactively react to future needs. In so doing, their technological capabilities will one day bring distinct advantages vis-à-vis traditional Western banks that principally know their clients from their financial transactions and direct bank relationships.

China is leading global venture capital investments into fintechs, and artificial intelligence. Along with its financial centres in Shanghai, Beijing, Shenzhen, and Ganzhou as well as emerging fintech hubs, China will make Asia the world’s digital frontier in financial services.

The power of ecosystems

We live in a sharing economy where sharing information and knowledge, with business partners, friends, social communities among others with little privacy concerns became the new normal.

Since everything is connected, new market entrants outside financial services benefit from their agility and technological capabilities as well as network effects and hyper-connectivity to expand scale and scope to offer financial services. They have created a system that transcend organizational boundaries and performs without sector borders because all actors contribute to the value constellation of the ecosystem.

Nowadays many services in banking and the associated relationship are considered as commodity service for basic financial transactions. We see innovators integrating several anchor businesses such as giving advice for suitable financial solutions. In their business model, it is irrelevant whether these options come from the bank or a member of their ecosystem because value is generated and captured through the constellation of the ecosystem.

Let the brand fade into the background and focus on the best solution for you clients - regardless where they come from.

While free banking becomes a reality in Asia with mobile and digital solutions, Western banks go the opposite route and charge increasing amounts for commodity services such as maintenance fees for current accounts, ATM cash withdrawals or payment services. This is a questionable strategy in a time where more and more young people refuse credit cards and cash and where entrepreneurs with their small businesses process all transactions through mobile banking apps of firms you have never heard of.

The success of an ecosystem strategy is measured as a whole. Alibaba Group’s segment reporting with core commerce, cloud computing, digital media and entertainment, innovation initiatives also includes financial services. Each segment stands for a perfect ecosystem with several core firms and international partnerships with many connections offering a plethora of products and services touching all sectors.

Think through the lens of ecosystems while developing strategies and transform the positive dynamics of the digitalization into sustained growth.

The key change drivers are technology and China

There will be many challenges for traditional banks. The penetration of non-banks into financial services with the young generation, easily switching bank accounts not knowing if the financial advisor is a robot, human being, or hybrid is a global phenomenon.

Chen Wenling's red memory sculptures where inpired by the work of Auguste Rodin, among Pablo Picasso, Salvator Dali and Fernando Botero, and stand-in for humankind's impulses towards voracity. It satirically points to the real threat for Western banks that comes within the process to the new world order. The new era of great development, great changes, and great readjustments, to recall the Chinese President Xi Jinping, begins with the end of Pax Americana and European dominance. Just note China’s growth and gaining innovation power, also from fintech firms with innovations flowing back to the Silicon Valley and Europe.

Technology is a key factor in an age of hyper-connectivity and hyper-competition and the providers of digital platforms will be the true winners of the ecosystem game. It is a question of time until those firms, many with origins in China, adopt their business models and challenge Western financial services.