In the ongoing battle of big banks versus fintech companies, there will be an ultimate victor: the incumbent. By 2025, leading banks will operate as digital financial superstores that blur the line between technology companies and banks.
The banking transformation process, years in the making, is only accelerating due to the recent rapid change in customer expectations. One-click ordering from Amazon, tracking fulfillment requests from Uber and other innovations are altering business customers' perceptions about what is possible and what is expected in e-commerce. These tech companies are setting new standards. Bank customers likewise expect their banking interactions to be easy, fast, transparent and on their own terms.
Up until now, the nonbanks have been leading the way to redefine the digital banking experience at a time when incumbent banks have been buried in regulation and cost cutting that has made onboarding, loan applications and other standard functions more difficult, time-consuming and frustrating. Such troubles have created an opening for nonbank lenders and fintech providers to leverage cutting-edge technology and their own largely unregulated status to deliver the type of service and experience consumers have come to expect from the best Internet and mobile sites. That said, it is tough for new providers to reach scale, so partnerships with, capital infusions from and acquisitions by banks are accelerating at a rapid pace.
And ultimately, these very same pressures are pushing banks inexorably toward a new model where banks will feel and operate more like tech companies with banking licenses. About 65% of banks' technology spending — funds previously focused on new products and enhancements — was deflected over the last 24-36 months to address regulatory gaps in compliance, risk, security and fraud. Looking ahead, with much of that investment made, banks can pivot back more towards customers' digital needs. Already, they are moving faster on all fronts — including the frequency of their app updates — and making investments in technology.
This pace will only get faster. The new marketplace model will take shape by 2025, when the industry arrives in what we have called "The Age of the Digital Banking Superstore." In this phase, electronic banking will be ubiquitous and clients will rediscover the benefits of one-stop shopping with large banks.
Nonbanks, meanwhile, will be stripped of their technology and regulatory advantages, assuming regulators act appropriately; thus, they will lose some of their competitive advantages, including cost and price. With profitability eroding, many fintech companies will eventually be purchased by banks, further enhancing banks' technology prowess.
Regional banks, however, will struggle to keep up with mounting costs of IT investments, leveraging white-labeled technology from third-party providers where they can. Small and community banks will attempt to leverage white-labeled technology to maintain their own value propositions and be forced to compete for segments truly valuing personal touch and local decision-making.
Even as large banks reassert themselves in a digital age, they will face competition from new market entrants eager to apply far-flung communications networks, artificial intelligence, cloud-computing platforms and other technology advantages to the world of banking. Virtually, the only thing standing between banks and giants like Google and the telecom providers will be a banking license.
Don Raftery is managing director at Greenwich Associates. Raftery leads the firm's commercial and corporate banking practice globally and can be reached @GreenwichAssoc.