Banking on Digital Natives: Why Banks Must Innovate

Through much of the twentieth century the bank was the building near to where we lived, where we deposited our salary, held some savings, and where maybe we asked for a mortgage. Our interactions with banks involved cheques, Paying-in-Books and meetings with men in ties with polished shoes. There was frequent paper form-filling and sending of documents by mail. Later we started to use ATMs to access cash, and pay by credit cards in stores.

The bank had a sense of ritual. Frequent interactions in local branches and correspondence through letters took time and were slow, formal affairs. The day a child opened his or her bank account was filled with significance as the starting point of their financial future. The meeting, years later, with a bank manager was personal, but sober and serious.

The role of the bank is changing in this new digital world, and so is our relationship to it. The bank is no longer the essential place that meets all our transaction needs. This is because the internet opened up commerce into the digital space, and the kinds of financial services we wanted changed. As people across the globe become more confident with digital money they no longer demand the rituals or services of banks.

Digital Natives – those born only ever knowing a time when the internet has existed – are most at ease with online financial interactions for buying things, managing their money and using the services companies offer on their websites. They have the expectation that transactions be instant, and accessible whenever they want, and for information to be clear and understandable. Traditional banks feel cumbersome, formal and irrelevant.

Since 2010, when we first mapped out this landscape of emerging offers of Alternative Value Exchange, the number of consumer-facing exchange platforms focusing on financial services has exploded. Some were built to meet Digital Natives’ new needs for easier access to money or transact money with lower fees, others were designed to enable straightforward savings and investments, and others to facilitate the peer-to-peer lending of money. For example, TransferWise has become popular for exchanging money across national borders. Google Wallet allows people to pay for things using their Google account. Square, available currently in the USA, Canada and Japan, is an alternative to expensive card readers. A card reader fits together with an app and turns a small business owner’s mobile phone into a mobile sales terminal. The most widely-used non-bank owned online service is Paypal, which has become essential for small businesses and for customers of online retailers. None of these companies existed just a few years ago, but they have captured the market and are disrupting the banking industry. They provide a service we want, and they have quickly gained our trust. So how are banks responding?

Some established banks are partnering with these disruptors. For example, last month Santander announced it was beginning a partnership with the peer-to-peer lending website Funding Circle. This collaboration will allow branch staff to inform customers who don’t qualify for bank loans about obtaining their money online through Funding Circle’s alternative model. The UK Business Secretary, Vince Cable, has said he “…wants to make this standard practice for all banks.”

Outside of partnerships, a new kind of bank is also emerging. Fidor, for example, launched in Germany in 2009, is highly original and disruptive. It is a bank that is only available online and treats its customers like co-managers. It offers interest rates for overdrafts that are directly in line with the number of Facebook likes its company page has. Its customers give advice to others in online discussion forums on the site. It boasts a favourable thirty minute average response time on Facebook, and is becoming popular with German Digital Natives looking for an alternative banking service and community.

It is hard sometimes for banks to keep pace. Having a bank account remains the passport that we require if we wish to engage in online transactions, but it is not the aeroplane that transports us to different financial future destinations. The bank account guarantees we have solvency, but we don’t require it to move our money around anymore.

Not only are all the functions of a bank being disrupted, but more and more players are also coming into the landscape. Instant messaging platforms are now enabling financial transactions. The consequence is that banks are being made more irrelevant in people’s lives as money transactions can happen without them. In China, WeChat (which has over 200 millions users) is leading the way with integrating chat and the processing of payments. It works in a similar way to Whatsapp but, it also allows money transfers through the chat interface. The function has become hugely successful and WeChat has already expanded into other emerging markets. SnapChat has, in the last week, gained the license in the US to operate a similar kind of functionality through their app.

The financial services industry is being disrupted across the world as market and consumer expectations are forcing change in the offer they promise to customers. The cost of technology decreasing, coupled with an increase in internet speeds will only lead to further disruption in the coming years. How will financial service companies respond to the merging of Digital Natives’ physical and digital lives? How will they capitalise on the new business models emerging from online networks and real-time connections? How will the flavour of disruption to financial services be different across different countries or common markets? We are excited to be continuing to explore these questions, and more, alongside Anthemis Group.

 

This article was written by Josh Dresner, an Associate at Claro Partners

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