Banks will have to rethink their approach to customers and move from being product-driven to focus on customers and service, said Pascal Bouvier, an experienced financial services professional who has been a venture partner with Santander Innoventures since the end of 2015.
He is constantly investigating the latest developments in fintech for investment potential, to find stimulating new ideas, and to stir things up through his extensive commentary, like his predictions for 2016 on Finextra and his blog. Banks face some fundamental challenges, he said in a recent conversation.
“It’s not only being digital, but also thinking about what is the core of the bank. Yesterday it was easy, it was the checking account, but I don’t think that is necessarily the case going forward. Legislation, especially in Europe, makes data from checking accounts accessible to a third party or two [at the customer’s permission or direction], so you can’t keep a customer with a checking account and poor customer service.”
Customers will be able to link outside service providers to their checking account, potentially leaving the banks as a low-value utility provider. Banks could take a lesson from technology companies, something they could learn from the book Platform Leadership, which Bouvier said is still the best book on platform strategy, examining Intel, Cisco, and Microsoft – companies that really understood platform strategy.
“Banks will have to act more like technology companies. They will have to be fintech incumbents and have a platform strategy, while in the past they used to be siloed.” Now, at least in Europe, they will have to share customer data.
“If I have an account and give assent to Google or Amazon to monitor what goes in and out of my account, the bank can’t do anything about it. If banks don’t pay attention to these nonbanks entrants, they risk becoming utilities.”
He cited the experience of a friend who got a call from a tier one New York bank asking if she would like to do something with the large amount she had in her checking account. She explained she was holding it for a down payment on a mortgage, and asked for a referral. Two weeks later no one had called; she called the bank’s mortgage department, had no success, and eventually got a mortgage from another lender.
“That’s a major fail for cross-mining data,” he said. Of course, it’s also a major fail for providing a basic level of customer service.
If banks don’t make this change, they face threats from fintech firms, he added.
“I mean every participant, not just startups. Make no mistake, the number one threat for banks and insurance companies is the same – not between themselves or startups but with nonbanks. Alibaba is number one, even bigger than Amazon. Google, Facebook, and Amazon – because of their sheer size, they are the real threat, they control the data.
“The tech firms have tons of data and they interact more frequently with all kinds of users.”
The threat could be through a regulated company like an Apple Bank or a Google Bank, or on the fringes with non-regulated services.
“Payments is only part of it, but look at the tech companies’ ability to get to a user in such an ambient and non-frictional way – Amazon’s Echo, Apple’s Siri, and Google with its virtual assistant. These are very, very interesting. A natural counter-strike for banks would be to have their own virtual assistants specialized for financial services.”
Bouvier thinks banks need to provide financial wellness services for their customers, taking a dynamic view over the life of an individual.
That would require a huge leap from the data silos and siloed compensation in most financial institutions today.
In a burst of optimism, Bouvier said there is a tremendous opportunity for financial institutions to focus on financial wellness.
“They could deliver contextual advice and services around that. Sixty percent of people can’t afford to lose their job and or have a health catastrophe. In the developed world, the majority of the population is not well financially. If you have a bank that approaches financial wellness for the life of an individual with financial education and certain services and products over a period of time, then it becomes a much richer environment. That forces the bank to think about the customer experience and a holistic view of financial services.”
But at a time when brokerage firms relegate customers with less than $100,000 to call centers rather than individual advisers, the profit potential for financial wellness programs looks limited. And does anyone really expect banks to step up into this broad range of services?
Bouvier may be more on target with his forecast of banking utilities.
As millennials come online, financial institutions have a once in a lifetime opportunity to catch them, he added.
“Some banks will be utilities, some will remain with a strong brand name, but a lot will become dumb pipes.”
Blockchain, or consensus ledger
Bouvier expects limited adoption of blockchain, which he prefers to call a consensus ledger, within the next five years, and more widespread and broader use in five to 10 years. Some delay in adoption is inevitable as the law catches up to technology.
“With publicly traded securities, you have a very specific securities legal framework that everyone agrees to. When a share of Apple is sold there is no doubt. The settlement is definitive, and even though it is dematerialized and trades on exchanges, a court of law knows this is definitive. If you put the Apple share on a consensus ledger and I sell it to you between us directly, I am not sure that the courts and the securities framework recognizes that. There will have to be a lot of massaging for the real world framework to accept the consensus ledger.”
He expects first adoption to come in financial instruments that are not publicly traded, such as syndicated loans and over the counter derivatives.
“In the case of syndicated loans, 30-40 banks own the market, so it’s much easier to implement a consensus ledger than in publicly traded securities.”
Expansion of consensus ledgers will require the development of neutral open standards, he added.
“That is a point of friction because financial services incumbents have never worked in a collaborative way with platform strategies.” However, the Linux Foundation has said it would like to broker open standards, and R3, or R3 CEV, the blockchain development company, has signed up about 40, and counting, major global banks for its work.
“The sooner we get to open standards, the sooner we will get accelerated widespread adoption in the industry.” Major financial firms are not going to cede their market power to one firm that owns the technology they rely on.
Alt lenders are at risk
The fintech boom has come after the global financial crisis and has developed in a world of very low interest rates.
“There is a generation of investors and traders that have never been through an interest or credit cycle,” said Bouvier, “and I do indeed worry about a lot of the alternate lending platforms out there.”
He suspects that some of the algorithms and underwriting frameworks might not perform so well as rates rise. What will happen to student lending platforms when rates go up?
“A student loan might not be the first you repay. First you look at your car loan, then your mortgage if you have one, and then maybe credit cards. Student loans will be a low priority.”
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