Thanks to the rise of mobile and online applications, people are slowly but surely spending less time in banks. This shift is giving rise to a wave of smaller banking institutions that are taking advantage of this digital disruption to usurp banking rivals that in some cases are hundreds of years old.
Alliant Credit Union, for example, is a financial institution with more than $10 billion in assets that are mainly accessed by 330,000 customers online. But Alliant Credit Union only has 11 retail banking locations. Almost all of its customers bank online.
At the core of that effort are banking applications from Jack Henry Banking that Alliant Credit Union decided to customize, says Julio Arevalo, manager of systems engineering for Alliant Credit Union. Most credit unions rely on an instance of that software that is managed on their behalf by Jack Henry Banking. Alliant Credit Union decided that by customizing the Jack Henry banking software running on a stack of software from VMware, they would be able to provide a higher quality banking experience to which they could more frequently add additional functionality, including the building of chatbots and integration with Alexa digital assistant devices from Amazon, says Arevalo.
“We’re not a traditional credit union,” says Arevalo.
Arevalo says investments in IT enable the credit union to rely less on physical locations that are expensive to build and maintain. That in turn helps enable to credit union to provide higher rates on savings as well as better terms of credit.
In fact, a new report from FIS, a provider of technology services to the financial services industry, suggests that small- to medium-sized businesses (SMBs) in the U.S. report higher satisfaction with services from community banks over larger banks. Common reasons cited by SMBs for switching banks are uncompetitive fees, dissatisfaction with services/products provided, outdated bank processes, or being declined for a business loan/line of credit.
Another startup looking to take advantage of the dissatisfaction with larger banks is The Metropolitan Bank and Trust Company (Metrobank) in the United Kingdom, which is eschewing the building of branches in favor of setting up locations in existing stores.
“We call it bricks and kits,” says David Gould, director of IT strategy and architecture for Metrobank.
The IT foundation Metrobank relies on is based on Oracle databases running on top of an instance of VMware that are managed on behalf of Metrobank by Rackspace. Thus far, Metrobank has set up outlets in 55 stores.
The basic idea is to provide banking services at locations where customers are already visiting versus asking them to make a special trip to the bank.
Competition between small and large banks is not the only source of digital friction in the banking industry these days. Competition within the banking industry is now also starting to arrive in the form of services provided by Paypal and Apple.
Apple is essentially using its large base of cash to finance transaction made using Apple Pay, notes Daniel Newman, principal analyst with Futurum. Over time, many of the customers that might have relied on a credit card issued by a bank to pay for goods and services will instead use Apple Pay applications running on their smartphone. Those funds many ultimately come from a bank, but the relationship between the customer and the financial institution is beginning to be disrupted, says Newman.
As that transition continues to occur, Newman predicts the banking industry is about to experience a real estate crisis. The need for all the branches to provide customer service starts to fade away.
In fact, Newman says the need for financial institutions themselves may well be brought into question as blockchain platforms start to mature. Blockchain platforms provide a trusted mechanism through which transactions can be directly processed without relying on a third-party to verify them.
“Blockchain eliminates the need for the middleman,” says Newman.
It’s not clear just yet whether banks will be hosting blockchain systems that eventually replace their core systems, or if the rise of smart contracts enabled by distributed ledgers based on immutable blockchain databases will result in the rise of some other means for conducting transactions. What is clear is that there is much potential for many banks to find themselves disrupted out of existence by what may be an existential threat to their primary reason for existing.
In the meantime, banking institutions are pouring massive amounts of resources into developing robust mobile applications of their own, especially as younger customers begin to view smartphones as the equivalent of their digital wallet. A global Accenture survey of consumers finds 40 percent of Gen Y respondents would consider banking with Google or Amazon. That inclination is even higher in markets such as the United States, where 50 percent would be willing to make this switch, finds the report. Just under half (46 percent) of Gen Y respondents would consider purchasing investment advisory services from an online service provider. A full 71 percent of all respondents said they would use entirely computer-generated support for banking services if available.
But usage of services such as Apple Pay may not be widespread enough yet to seriously threaten banking institutions, says Bob O’Donnell, president and chief analyst at TECHnalysis Research.
“I can think of maybe three things I used Apple Pay to buy,” says O’Donnell.
The biggest issue banking institutions struggle with, however, is arguably not the core technology, but rather the rate of change facing an industry that previously measured rates of change at a glacial pace. Much of that rate of change is being accelerated by recent advances in the fintech sector that are now being applied to transforming the banking customer experience, says Bill Sullivan, global head of financial services market intelligence at Capgemini Financial Services.
“They are learning to fail fast,” says Sullivan.
At this juncture, it’s apparent to everyone that banking is being inexorably transformed. There are still plenty of older customers that see value in visiting a local branch office. But over time, the trend is moving toward increased reliance on digital transactions, many of which will be conducted using a smartphone application that takes advantage of chatbot software to provide financial advice along with other suggestions. And if that doesn’t prove satisfactory, there will probably always be a human banking professional standing by that can be contacted via videoconference anytime from anywhere. In fact, instead of thinking in terms of when the bank will be open, some form of a bank of the future is likely to always be a simple tap of a smartphone application away.