Traditional banks will survive digitisation in some form, but have to adapt and in some cases specialise.
Some banks will adapt faster and better, meaning that the banking landscape will be more diverse with different banks taking different roles.
Technologies such as cloud and DLT will be central to banking post-digitisation, banks that are ahead of the adoption curve with regards to these new techs now are better placed to succeed in the future.
Some banks will adapt and coexist with the new financial ecosystem that is developing, each individual bank will need to find their own place in that system in order to survive
In one of the first discussion panels that took place at Sibos 2017, a collection of experts from across the banking sector tackled the question of whether traditional banking institutions will be able to evolve in the face of disruptors and more agile competitors with sights on a greater market share, or whether the banking giants of today are dinosaurs staring extinction in the face.
Despite this existential threat to traditional banks, the overwhelming belief in the room (perhaps unsurprising considering the makeup of the panel) was that the financial services landscape post-digitisation did have room for incumbents, provided that they could get on the digitisation bandwagon in a hurry.
Perhaps this realisation is the reason that legacy financial institutions are taking a more collaborative approach to fintechs than in previous years. Whether this is an active decision or simply recognition that fintech cooperation is essential for survival is a more difficult question to answer, and in all likelihood this varies from bank to bank.
Société Générale Head of Interbank Relationships Fraintz Teissedre is one proponent of greater harmony between banks and fintechs. Banks still hold key advantages over disruptors in many areas, but must also recognise that fintechs do possess an edge when it comes to areas such as creative agility and the strengths of the new concepts it brings to the market.
Fraintz is keen to stress that banks are innovators too, and the banks that best understand the direction financial services will take in the future will bring stronger innovations to the table, but partnering with fintechs almost inevitably leads to an acceleration of that innovation, which is clearly valuable.
Alexander Bazarov, Senior Vice President of Sberbank, laid out his vision of the future role banks have to play as one of the four pillars of the future financial ecosystem. Bazarov explained that e-commerce, internet search and social, mobile operators and banks each individually hold valuable customer data that will form the core of digitisation of finance moving forward, but that only banks who can position themselves correctly in that ecosystem through their technology offering will make it beyond the sytem's periphery.
One area of disagreement on the panel was the speed at which banks can, and should move forward with digital innovation.
Petra Hielkema, Division Director Payments and Market Infrastructure at De Nederlansche Bank acknowledged that regulators were determining the pace of change for many banks’ digitisation objectives, but as a regulator herself was keen to stress that a cautious but steady approach was the right one to take, especially where the banks and regulators veering into completely unknown terrain.
Hielkema argued that financial stability moving ahead could only be built upon consumer trust, and that safe and steady progression bolstered by consistent dialogue between regulators and banks would be the key to ensuring this, regardless of whether this was to the disadvantage of the banks in the short term.
Why are banks struggling?
Tom Eck, CTO of IBM Industry Platforms explained that fintechs do not have more talent at their disposal than traditional banks, instead their advantage comes from their ability to “take chances, make mistakes, and move forward faster”.
Whilst financial institutions do remain committed to their own internal innovation departments, implementation of technology developed in-house can be a frustratingly arduous process, thus opening the door for disruptors unencumbered by the same friction.
Eck argues that checks and balances in a highly regulated industry are in place for the right reasons, but that banks’ current risk profiles inevitably leave them in a position of struggling to maintain any agility regardless of their internal innovation efforts.
Alexander Bazarov sees the primary driver of banks’ internal development inertia slightly differently. Bazarov argues that financial institutions are committed to digitisation and innovation at the swiftest possible rate of change, but that the dangers of a delayed reaction to the threat posed aren’t close enough to generate serious concern.
Bazarov contends that whilst banking maintains its position as being the only industry to generate trillion dollar profits per year, and remains the second biggest percentage (behind IT/tech) of top 30 global companies by market cap, there is a psychological block preventing financial services fully comprehending the extreme threat posed to the industry by ignoring evolution.
He concludes that financial institutions are sitting on huge legacy challenges, which they are aware of and are committed to solving, but that the threat of obsoleteness’ lack of immediacy is muddying the waters.
Where are banks in five years?
The session concluded with a debate on what form banking will look like in five years’ time. The general consensus here was that banks will evolve over this period, but in different directions, meaning that there will be far less uniformity between banking service providers, their areas of expertise, and their products.
Fraintz Teissedre was bullish on incumbent banks’ future, pointing to the fact that institutions have been labelled as dinosaurs and lacking innovation agility for decades, yet have maintained the ability to react to changing customer expectations previously.
His vision for the future of banking is one that primarily puts banks in the position of being a trusted third party facilitating the relationship between a service provider and the customer. Banks are unable to achieve the agility required to innovate user experience-driven services, but will remain the service that consumers feel comfortable depositing their data with. The priority for banks should therefore be to reinforce this strength and to continue ensuring that customer data remains secure.
For Alexander Bazarov, the variation in the banking services of the future will be generated by the fact that some banks will be early enough adopters of the new technology required to facilitate the new digital ecosystem to place themselves at the heart of it, whereas others will have to specialise in niche areas once the space for central cogs in the system becomes too crowded.
Tom Eck opted to focus on the future of correspondent banking, and in particular how back office processes will be radically changed by distributed ledger technology. Eck believes that less friction, faster transparency, and the increased visibility for regulators are a number of benefits DLT offers which is why the technology will be adopted quickly. Eck stated that DLT will be the foundational technology for back office within five years, which is bad news for the banks who have already fallen behind the DLT innovation curve.