7 key trends in business banking today

As we move into the second decade since the global financial crisis, disruption in the banking industry has made the sector more complex than ever before for clients, executives and investors.

While the priorities for banks include taking advantage of the latest technological innovations, Fintech companies are offering competition as well as opportunities. Consequently, the industry sees collaboration as the key to long-term profitability. The problem is that tech firms are invading the territory occupied by traditional providers, bringing with them Techfin solutions for financial services.

The challenges are complex, and those banks which embrace innovation and secure key collaborations will reap the benefits. Here we look at some examples of the challenges facing the industry.

1. Disruption in the UK market

Recent research shows that the UK banking sector is the most disrupted in the world. New entrants into the market are attracting 15% of revenue and a similar level of new investment. UK regulators have been keen to encourage competition and the result is new names popping up regularly. Customers now have many options other than just the mainstream banks in which businesses and the public alike have lost some confidence.

One interesting aspect of the business they are attracting is that, in many cases, the challenger banks are being used as secondary accounts, with just 20% of customers transferring all their business to these startups. The traditional providers, meanwhile, are upping their game to meet the challenge and investing heavily in their digital services. 

2. The open banking battleground

New open banking regulations are breaking up the traditional market and the perceived role of banks. Over the past few decades, banks have sought to offer a complete vertical service for customers, but new entrants are looking at a horizontal approach targeting niche services and products. The objective is to link banks and third parties to create competition and in the UK there are now over 60 third party providers registered with the regulator.

Open banking not only creates options, but it also gives a more detailed understanding as to how your accounts work. The Financial Conduct Authority and its international counterparts are busy checking a plethora of apps and websites which may soon become commonplace as banks unbundle their services.

3. Smaller banks could face new challenges

Small community banks used to have a competitive edge, particularly in the US and Germany. However, they are increasingly under pressure as economies pick up and the costs relating to compliance come down. The major players are using their digital offering to gain new business and improve the experience for existing clients. 

In the US, the big three Wells Fargo, Morgan Chase and Bank of America have just 24% of branches country-wide but took almost half of new account business last year. Community banks have half the branches available to clients yet have seen new business slump.

In Germany, the Landesbank system is also under pressure to consolidate in the face of low-interest rates and the squeeze being applied by online startups. The proposed merger of Frankfurt-based Helaba and Deka is the latest sign of concern about the fragmentation of the banking system in the country.

4. Banks look for a future premium

If banks can build confidence in their plans, they may be able to take advantage of a future premium on their stock with some analysts claiming this could see valuations rise by up to 50%. BBVA in Europe and JP Morgan Chase in the US have seen their stock price soar as investors decided that they have got their planning right. Other banks, meanwhile, find theirs trading at less than book value.

Banks will have to show that Fintech investment will improve profits and ROI; otherwise increased valuation in the banking sector may go the same way as the tech bubble.

5. Catching up with mobile payments

Western bankers look in awe at what is happening in China and India in terms of mobile payments with Alipay, WeChat and Ant Financial taking a sizeable share of mobile payments worldwide. These third-party mobile and online payment platforms also share valuations which reflect their role for their billion plus users. 

Change is coming but will it be through direct aggressive interventions such as Ant’s attempt to buy MoneyGram, or partnerships such as Alipay’s link-up with Standard Charter? Mobile payments will likely be the battleground in 2020.

6. Boundaries will continue to be blurred

The emergence of open banking has seen the boundaries between banking and digital offerings become confused, potentially creating opportunities for tech companies. In Europe, the Payment Services Directive is an initiative designed to regulate payment services and providers, increase competition and allow non-banks to participate. 

Major retailers may well look to adopt account-to-account payments, eliminating card networks. In the US, prepaid accounts are already internalising payments via proprietary apps. Expect tech firms to show their cards soon.

7. Privacy and security

Privacy remains a priority amid the conflicts associated with providing customer information through open banking and protecting it under data protection legislation. Serious challenges will arise as transactions take place through third-party channels. The banks will have to take control through new governance systems and improved security standards involving third-party authentication.

All-in-all this year looks to be a busy year for banking executives and their strategists.

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