Will Banks Survive the Era of Digital Disruption?

Traditional banks are facing heavy competition from new entrants that are delivering customized products, streamlined technology and responsive customer service, and are backed by venture capital and institutional investors....

Snehal Fulzele 15th July 2015

Traditional banks are facing heavy competition from new entrants that are delivering customized products, streamlined technology and responsive customer service, and are backed by venture capital and institutional investors. Advances in technology, maturity of digital channels, big data and analytics and focus on customer experience means that banks are under pressure to adapt to this dynamic environment without affecting the bottom line. The emergence of digital disruptors such as Uber and Airbnb has led consumers to demand fast responses, simple solutions, access anytime, anywhere and service across all channels. At the same time, a recent Morgan Stanley report on “Global Marketplace Lending” demonstrated the regulatory arbitrage that marketplace lenders have over banks. Morgan Stanley calculated a non-bank institution has a 45.5% return on equity vs. a bank’s ROE of 30.5%. This is a tough hurdle to overcome. Many banks are slow in reacting to this changing environment and are under threat from digital disruptors in financial sector with improved customer experiences and lower costs.



banking-disruptionHowever, it’s not all bad news. Banks need not be afraid of the new online entrants and disruptive technologies that threaten to shake up the financial services sector. Banks have long standing relationships with their customers and can respond by adopting an approach that has innovation and responsive digital experience at the heart of its strategy. The same Morgan Stanley report had the surprising fact that “Millennials are more likely to use traditional banks to borrow than are other generations, but they care deeply about rates and fees…setting up incumbents for a race to invest in their technology and service to become the ‘go-to’ financial provider as they can’t be best-in-class on price alone.” Digital transformation will enable banks to not only improve customer experience but also operational excellence. Banks need to offer cutting-edge solutions that can be rapidly introduced to market and can be easily configured to adapt to changing environment. This means banks need to invest in a technology system that provides,



    1. Affordability: Current traditional lending infrastructures have costly, outdated systems while cloud-based infrastructures can dramatically reduce costs.


    1. Speed: Traditional underwriting process is slow and laborious and needs automated processes to approve loans in minutes.


    1. Reach: Antiquated processes to measure risk and creditworthiness result in a large number of rejections whereas alternative data from online sources enables more educated decisions, thus, extending reach.


    1. Convenience: Current lending processes require a borrower to make an appointment, have institutions verify information while online lenders enable loan applications and the securement of a loan through mobile devices.


Banks such as BBVA have taken some concrete steps in this direction using digital innovation to meet their customers’ financial needs in an improved and efficient manner. BBVA has introduced the virtual assistant Lola, video banking, and the crowdfunding platform called Suma to become a customer-centric bank. Apart from adopting the strategies of alternative lenders, banks can also partner with other online lenders or opt for their own online platform, an interesting convergence of traditional and emerging finance. For example, FundingCircle and RBS recently announced a partnership to give thousands of small British businesses greater access to finance. Such convergence is bound to continue, providing an unsurpassed experience to both borrowers and investors.



Technology can enable banks to digitally transform and compete with the new entrants. Banks must invest in a technology solution that is agile and flexible, and is aligned with their business objectives. A clear strategy and advanced technology solution can help banks thrive in this increasingly competitive and technologically sophisticated market.

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