Separate Paths to the Same Goal

1. January 2018.

The evolution of banking has been in a period of rapid change of late, characterized by some as two distinct channels made up of traditional banking and fintech. This conceptual model has been useful for the illustration of the volume of change underway, and the foundational shifts that are underway not just in how payments are processed but how we are paying and the direction payments trends are taking consumers. The author calls out one of the threats to the existing banking model:

Another impact will be a reduction in the friction inherent in switching banks. Think about how easy it is for a cab driver to switch his or her entire personal business from Uber to Lyft on a daily basis. This opportunity for an individual to “exit” the network puts big pressure on traditional business models. It gives the advantage to intermediaries that are able to connect with consumers on a personal level, give them a voice and create loyalty that reduces “exit.”

Financial Institutions have been aware of this sea change, with many having taken steps to become customer centric in their business approach and organizational architecture, as the transactional interaction with an individual consumer will be the basis for engagement. The author puts it thusly:

In a world where payments are cheap, instant and 24/7, these new crypto-banks will be trusted intermediaries that accept deposits from customers and manage those customers’ capital. But unlike traditional banks, they will not lock users into a closed garden of financial services. The value they provide to their customers will be measured in terms of their ability to package solutions into digital products. They will form a marketplace of banking services, ranging from lending and wealth management to insurance.

Already FIs are incorporating the use of external API standards to utilize collaborative personal financial solutioning that draws on products and services to generate an individualized solution. While the practice is becoming more widespread, the widely predicted faceoff between traditions FIs and Fintech is becoming a more cooperative competition model, wherein individual companies try to secure the prized customer facing role and act as the coordinator of the component service and products. At the core will be each consumer and their individual profile.

Standards for digital identity will create new models for evaluating risk, which will allow connecting credit givers to credit takers and remove reliance on centralized credit scoring providers. Already, social and mobile apps are offering better data privacy controls for sharing information with third parties as a result of public demand. Better encryption-based privacy controls can empower users to choose their credit providers by sharing more of their information and securely recording the full context of each transaction.

Mercator Advisory Group recognizes the broadening service delivery role more FIs will be playing in service of their established portfolios of consumer clients. We anticipate the advisory and overall vison the central FI will deliver to each consumer can in some ways be likened to that of a general contractor that helps the client to define and realize their own financial vison. In other cases, the FI will contribute a portion of the service or a product making up the whole. In any case, FIs that have invested in organizational fluidity are well positioned to adjust to these changing market demands.

Overview by Joseph Walent, Associate Director, Customer Interactions Advisory Service at Mercator Advisory Group

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