The global banking industry needs to revamp its digital platform to combat the growing threat from online retail market places writes Briony Richter
The competition in retail banking from fintechs has arguably receded as banks have made strategic partnerships to expand the digital services they offer, rather than compete with the start-ups.
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The real threat is coming from companies such as Amazon, Japan’s Rakuten Ichiba and Alibaba, who are swiftly staking a position as a viable alternative for traditional banks customer base, according to a report from McKinsey ‘Remaking the bank for an ecosystem world’.
On the emerging digital threats, the report commented that new strategies adopted by the aforementioned platform companies are even more challenging for incumbent banks.
By creating a customer-centric, unified value proposition that extends beyond what users could previously obtain, digital pioneers are bridging the value chains of various industries to create ecosystems.
These strategic moves being made by so-called ‘platform companies’ are attractive to consumers as the companies are providing them with unique experiences, and also reducing customer cost. They are quickly becoming more central in financial decision making for customers.
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By GlobalDataThe rate of competition from these new entrants has increased much faster than had been anticipated and companies like Amazon and Rakuten, are reshaping one industry after another, blurring sector boundaries as they seek to be all things to all people.
Amazon’s founder, Jeff Bezos has been tapping into financial innovation to extend the companies reach into the daily lives of consumers. Amazon continues to confound rivals with moves into the cloud, logistics, media, consumer electronics, and even old-fashioned brick-and-mortar retailing—and lending and factoring for small and medium-sized enterprises.
Amazon is hurdling through traditional industry territory by offering an ever-growing range of products and services. Companies such as Amazon are becoming important to the financial industry as they move the data they have received into cloud storage and push further towards artificial intelligence.
Furthermore, banks will end up losing out on customers and profit. The report estimated, that if banks fail to digitalise the business model they have, customers will move to other providers like platform companies who are already offering similar financial services.
By 2025 the global banking industry’s ROE (return on equity) could reach 9.3%, but if consumers move to digitalised companies as quickly as they are using emerging technologies the ROE could fall to a dangerously low 5.2%.
Banks cannot afford to wait any longer to extract the potential of digital to industrialise their operations. As an essential first step, those that have not yet fully digitised must explore the new tools at their disposal and build the skills in digital marketing and analytics that they need in order to compete effectively.
This gain from digitisation would lift the average bank’s ROE by about 2.5 percentage points—not enough to fully offset the 4.1-point drop forecast in McKinsey’s worst case scenario. But no bank can afford to forgo the benefits of digitisation, and individual banks can do much better than the average.
In Amazon’s case, they already have a foot in the payments industry offering small businesses a payment-processing service. It is an initiative to get more customers to buy from Amazon using their debit cards.
Another serious competitor that is taking advantage of areas where banks are falling short is Japans’ largest online retail marketplace, Rakuten Ichiba.
Rakuten, (meaning optimism) was founded in 1997 by Hiroshi Mikitani. With a membership population exceeding one billion, Rakuten has been able to access services past online shopping.
The services provided by Rakuten range from online and off-line services, including credit cards, mortgages, travel, security brokerages and much more. Using e-money and loyalty points, Rakuten customers can make purchases from thousands of stores.
By embracing digital innovation they have created a unique ecosystem and strengthened their existing customer based. The company also runs the instant-messaging app Viber which has around 800 million users globally.
Losing customers loyalty to these companies is a real threat if banks do not respond quickly to the situation. The report concluded that new digital entrants are having an impact on bank performance, particularly by threatening the customer relationship and margin erosion across retail segments.
Chinese company Alibaba has also tapped into offering financial services, by providing electronic payment services and data-centric cloud services. Alibaba’s aim is to completely transform how businesses operate by providing innovative technology to connect with consumers globally.
Alibaba is not just an enormous e-commerce company; it is also a large asset manager, lender, payments company, B2B service, and ride-hailing provider.”
Will banks join up with these companies like they have with certain fintechs, or do they aim to beat them? If it’s the latter then banks will have to fully implement a digital platform. McKinsey argue that banks still hold higher trust among consumers than tech companies do at this time.
Although the report noted that the banking industry had been showing improvements in capital, cost and liquidity, it described, a string of lackluster performances and concluded that if banks don’t digitalise the services they offer, the threat of non-bank companies penetrating their platforms will only continue.
Banks must develop a platform that will be able to enable these emerging technologies and changes in trends among the customer base. Certainly, the competitive nature of the banking industry will only be heightened with the implementation of open banking.
