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Through Abe smith, CEO of Paymentology,
The rising tide of neobanks in recent years has raised questions as to whether incumbents are on the verge of becoming an endangered species, or even a relic of history. In reality, the solution for traditional banks is deceptively simple: they just need to bridge the gap between themselves and their customers.
For the first time in their history, banks are seeing a rising tide of FinTech making forays into services they once monopolized. In some ways, this shouldn’t come as a surprise: Most banks still rely on legacy systems and complex technology making them unsuitable for the demands of the digital age.
This creates a stark contrast to the digital-native and tech-savvy competitors that have emerged in recent years. Unhindered by stacks of legacy infrastructure, these new entrants have brought innovations from across the fintech space to the banking world, introducing everything from enhanced APIs to artificial intelligence and machine learning. But, more importantly, these challengers have brought the seamless consumer experience that people are used to in the retail world.
Today’s banking customers are not only used to elegant interfaces, but also to intelligent service. It is no longer enough for a bank to simply provide a safe place to store money. In order to keep physical banks on the main streets, incumbents must compete with these emerging levels of connectivity and personalization.
Try the challenge
With fintechs slowly but steadily changing customer expectations for banking services, it’s no surprise that banks face a very real threat to a previously monopolized market. But what exactly does this threat look like and how imminent is it?
New entrants saw the opportunity to break up the components of traditional banking and offered targeted solutions at lower prices. As a result, many services that were once the purview of the big banks have been taken over by fintechs. International bank transfer, money transfer, currency conversion and direct debit services are just a few examples. These have long been areas of substantial income for traditional banks and with the loss of share in these markets, banks must find new services that they can provide to their customers to generate new income.
The impact of losing these additional sources of income is one thing. But, another real danger for banks is that these secondary services provide a gateway to complete customer disengagement and eventual customer disengagement.
With neo-banks able to offer free or competitively priced secondary services, as well as hyper-personalized banking services for day-to-day use, there is a real chance that what was an initial engagement with selected services will become a real deal. full client recovery. Taking advantage of the benefits of ultra-personalized and tailor-made services, customers transfer money to their neo-bank as soon as it is available, relegating the incumbent to a simple temporary deposit account.
In April 2021, data from Bacs showed that UK consumer banks were shifting allegiance to consist of a sizable cohort of neo-banks. This trend has been going on for some time now and if nothing changes, this loss of customer base will lead to long-term loss of market share for banks.
How data can help
The good news is that this threat to incumbents is not yet existential. For now, 51% of people still prefer to use a traditional bank for their primary banking needs. But, given the small size of this majority, it is clear that banks are at a crossroads and the need to adapt is increasing.
Properly leveraging the data that banks have access to is key to delivering a personalized experience, and this is where the smart application of technology for a bank’s payment processing systems is required.
Billions of payment transactions around the world begin every day at stores, ATMs and websites and then make their way to the Mastercard, Visa and UPI payment networks, where they in turn are redirected to a bank on the issuer side. for approval. This gives banks a treasure trove of valuable data sets at their disposal, which, if properly leveraged, can provide insight into their customers and spending behavior.
Analytics-based processors can equip banks with the tools they need to improve the customer experience – a key element in keeping them competitive in an increasingly diverse banking environment. Equipped with AI, integrated into their payment processing, banks will even be able to offer personalized products to consumers at the time of spending, such as a Buy Now, Pay Later option or an insurance offer for the holidays that a customer has just booked. Buy Now Pay Later is becoming incredibly popular in the UK, with 37% of them already using this service and an increase of 39% per year. However, traditional banks and their legacy infrastructure prevent them from offering these services. The ability to provide such services will provide traditional banks with huge new sources of revenue while providing their customers with a service that makes a difference to them.
With this, banks can bridge the gap between themselves and their customers and deliver on the promise of customer focus. In turn, this will enable them to lead the way in reclaiming market share from agile competitors, leveraging the monetization of personalized products and services, and being responsive to the digital age.
Survival of the fittest
The banking environment is changing rapidly and the best suited players will invariably survive at the expense of those who are not. While neo-banks are currently driving this change in the landscape, incumbents are more than equipped to survive and thrive. For traditional banks, legacy processes are the product of their longevity and this historic presence provides trust, a valuable asset.
Initiatives like Open Banking are ushering in an era of data-driven, hyper-personalized banking services that put customers first. With more people switching banks than ever before, incumbents can only maintain their market share for so long. If they are to survive, banks must harness rich card data to deliver the tailor-made services customers need.
The time for banks to reflect and reconsider the way they work has never been better.
About the Author
Abe Smith is CEO of Paymentology, the cloud-native global issuer payment processor that gives banks unparalleled access to real-time customer and card spend data. Abe is a very seasoned leader with 25 years of leadership experience in various fintech and financial services groups including CEO of Dealflo; Geneva partners and competent EU. This level of experience has allowed him to experience first-hand the challenge posed by neo-banks and to spot opportunities in how incumbents can keep pace.
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