Convergence of industries in the digital world- what should banks next move be? (part -1)

By Karthik V J

Convergence of industries brings a tectonic shift

When one of the major industrial convergence started its genesis, Google was not yet born. The postal industry and the information technology industry started to converge with Hotmail in 1995. This led to a tremendous shift in the way we communicate. Fast forward to 2017, and I do not remember the last time I snail mailed a letter or sent an MMS.

The key point to note is the tectonic shift such a convergence brought out. There is a definition of convergence from Merriam which stands out – the merging of distinct technologies, industries or devices into a unified whole. To this, it is important to mention that when the “unified whole” is achieved, there will be a similar tectonic shift which causes an exponential technological progress.

This convergence will go on for the foreseeable future till the point of singularity is reached. When singularity is reached (which itself gives another perspective on convergence), we will witness a whole lot of divergent industries converging and becoming more digital.

What does this mean for banks?

There is a wonderful insight in a Goldman Sachs study[1] – 33% of millennials believe that they won’t need a bank in 5 years and 14% of millennial smart business owners use non-bank alternate financing. Which industries are these millennials and Generation Z betting upon (it is important to understand that these two groups form nearly 30% of current world population)

Over the past several decades, banks have been steady against a threat from other industries like brokerage firms, automobile companies, software companies, communication majors and mobile operators (with a larger user network and reach than banks) etc. But none of them have been able to provide the convenience and the trust along with the “perceived value” to deal with customers’ hard earned money. Yes, there have been disruptions but the “rock of banking” was not swayed by the waves of disruption. But, now the wave is strong with more industries converging towards the banking sector, driven by the increase in smartphone penetration, better data connectivity, increased computing power. (That means there are more number of devices which are more powerful, closer to the customer and bring a better power than the legacy systems of banks)

All the traditional areas in which a bank operates upon are being opened up by disruptive companies – Accounts are being provided by several mobile operators; Credit Cards and Debit Cards are being replaced by wallets and other e-payment solutions such as Apple Pay, Google Pay etc.; Loans, Capital Raising and Mortgages are being replaced by crowd funding through platforms like Kabbage and KickStarter; Wealth Management Services are being more automated; Currency Exchange is being revolutionized by companies such as TransferWise; Online payments is being totally owned by companies such as Ant Financial, PayPal etc.

These companies are providing unmatched value and an unmatched experience which is making customers flock to these technology driven companies.

But what are the industries that are crossing barriers and leveraging their digital prowess to move into the banking industry?

Mobile Operators, over the years have built a vast user network (in some countries more than the reach of banks). Hence, the telecom industry are the front runners in providing the value. Telecom providers also have the advantage of a broader customer appeal and do not carry a negative image of the 2008-09 financial crisis. The success of telecom sector in providing banking has been well documented through success stories such as m-pesa. Yes, while telecom operators have wallet and peer to peer lending options, they do not offer a wider plethora of financial services.

Other contenders in this space are the technology firms. Companies like TransferWise, Kabbage, PayPal, Bitcoin etc. are taking away a significant pie of the revenue share of banks through their disruptive, cost efficient and innovative offerings. The reach of these applications has grown tremendously because they provide the necessary services at the lowest cost to the user while leveraging the power of data to make sure the right offer is given to the right person.

Social media is not far behind. The millennials and the Generation Z spend more time of Facebook, WhatsApp, Tencent and similar other social media applications than any other application. They have the largest user reach. China based Tencent has launched its own bank. Facebook messenger can be used for payments.

Retailers like Alibaba, Walmart and Amazon also have a wide reach and are closer to the customer. Millions of transactions are carried on these retail stores making them the right industry to eat away into payment and transaction pie owner by the banking industry. Alibaba backed Ant Financials control nearly half of Chinas payment market.

Other industries like automobile (through provision of branded insurances and other complementary services through their own portal and financial payment platforms), travel (through their own wallets),  insurance companies and health care provides (by using their own platforms for payments) are also converging into the traditional area of banks.

In short, banks new competitors are not banks, but companies like Alibaba, Google, Starbucks, telecom operators and other companies where millions of transactions are made on a regular basis.

The Future of Finance, Part 3: The Socialization of Finance – Goldman Sachs, March 13, 2015

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Karthik V J