Fintech promises to bring slick IT, predictive analytics, and better customer service to banking, but it is, arguably, not fundamentally disruptive – or at least not so far.
Are there any business sectors where technology is not just dismantling the barriers to entry that used to make competition too onerous, as in music, but actually changing what the business offers?
Newspapers, which used to make money from advertising, with each newspaper targeting a certain demographic (acting as a sort of watering hole where advertisers could hunt particular consumer groups), are now in decline. Online companies are taking the advertising revenue. Could the same thing happen to banking? Of course, banking does not rely on income from advertising, but it may still face real change driven by some of the same dynamics that have hit newspapers so hard: consumers may no longer consider them essential and targeted advertising could make them vulnerable to competition.
Mark Carney said in a recent Mansion House speech that fintech has the potential to “deliver a great unbundling of banking into its core functions of settling payments, performing maturity transformation, sharing risk and allocating capital. This would mean revolution, fundamentally re-shaping the financial system”. He went on to say, however, that such “revolution” will not necessarily be the outcome – that “restoration” and “reformation” are also possible.
What could help determine whether fintech brings revolution, restoration or reformation to the banking industry? Banking services will always be needed, but consumers can now buy financial services from a whole range of new start-ups. In the UK, they will also soon be able to access their bank data from non-bank entities. The bank as the main ‘watering hole’ for financial services could go away, though banks have better brands and are much more likely to be trusted with people’s hard-earned cash. After all, why would anyone put their money with Bank Rinky-Tink Inc?
To see an example of where technology is changing the fundamentals of an industry, one only needs to take a look at advertising. What used to be said about advertising – that half of it is wasted, but nobody knows which half – no longer really holds true. The use of BigData allows companies to track how often adverts convert to sales, who made the purchase and what else interests that individual. It also allows companies to analyse wider, group responses to marketing and gives companies a very detailed picture of who their key consumers are.
Using data to analyse a campaign is not, however, the same as harnessing it to create one, which is where Persado, an advertising company using AI, comes in. Persado claims to use ‘cognitive marketing’ to make advertising more ‘impactful’ to consumers. For example an original text saying “enjoy a higher limit on your card” was changed to “you’re eligible for a higher limit on your card”, making use of the emotional drive behind “you’re eligible”. That small change led to a 23 per cent increase in conversion rate, according to Persado’s CEO.
The use of open APIs will soon give bank customers access to their account data on any site that wants to host it (and, by extension, on any device they choose). When that happens, some banks may find that non-bank brands become strongly associated in consumer minds with core banking services – much as handset makers Apple or Samsung, rather than telecom network operators, are seen as the providers of telecom services. The question may then be whether the core business of a lending bank – maturity transformation, which is ultimately dependent on consumer trust – also requires a strong brand to be feasible. If it does, the provision of financial services could be left to those brands that can best nudge customers and best persuade them that they are a safe pair of hands.
Ouida Taaffe is the editor of Financial World magazine.