As banks find their margins squeezed on traditional lending and payments activities, nonbank credit and financing—supported by technological innovation—is growing exponentially.
TECHNOLOGY TURNS BANKING INTO A UTILITY
Banks are facing a period of deep disruption as their products become commoditized as a result of new technological advancements. “Technology is driving dramatic changes in consumers’ behaviors and expectations—and that affects all traditional transactions,” says David Edmondson, Accenture senior managing director, North American banking. “In addition to that, the old way to make money on banking does not work as well as it used to, [and that change] has mostly to do with regulations introduced after the financial crisis.”
Accenture estimates that competition from digital players may erode as much as a third of traditional retail banking revenues by 2020, or even before that. Banks risk becoming like utilities as clients’ loyalty fades. In fact, more than 70% of customers now consider banking relations purely transactional.
Traditional banks are under a tremendous amount of pressure, with significant revenue at risk as a result of these trends, according to Edmondson.
In the period before the financial crisis returns on equity were around 20% for the 50 US banks with more than $50 billion in assets. Accenture argues that only nimble banks that adjust to today’s new landscape can go back to those levels (with ROEs between 18% and 25%).
New digital banking platforms will be launched either by large technology providers or by banks with large investments in digital solutions, notes Accenture. For example, Facebook is launching an app in April to facilitate payments between friends using Facebook Messenger. And a survey among banking customers shows that 50% would be ready to do banking with nonbanks such as Apple, PayPal, Square and Costco. That percentage rises to 70% among millennials (adults aged up to 34).
“They’ve established a level of trust with their clients through the use of technology mobility [and] are becoming...a trusted adviser,” says Edmondson. “My children have much more confidence in Apple than in banks. When they [are] in their thirties, they will [still] be more at ease with Apple than with traditional banks.”
Providing alternative services can help a bank recover its relationship with customers. “To create new revenue streams, the banks have to use what is unique to them—such as their secure reputation and partnerships, [which will] enable them to provide a bigger role in their customers’ lives,” says Edmondson.