5 disruptive technologies that are challenging the traditional banking model

Social Lead for IBM Analytics - Financial Services Sector, IBM

Titles such as “Warning to Banking Industry: Innovate or Die” make people pay attention. As dramatic as its title may be, this article from The Financial Brand embodies the heart of a serious problem for the banking industry: Disruptive technologies are challenging the traditional banking model. It should come as no surprise that banking is a competitive industry, but the form of that industry’s competition is changing. The playing field is transforming thanks to the rise of disruptive technologies spawned by what Simon Mathews calls “The Uberization of banking.”

In his piece for The Financial Brand, Mathews cites Tom Goodwin’s article for TechCrunch that discusses the success of companies that own the customer interface. Goodwin explains, “The new breed of companies are the fastest-growing in history. Uber, Instacart, Alibaba, Airbnb, Seamless, Twitter, WhatsApp, Facebook, Google: These companies are indescribably thin layers that sit on top of vast supply systems (where the costs are) and interface with a huge number of people (where the money is).” What exactly does that look like? Mathews’s article includes an infographic featuring a series of thought-provoking statements from Goodwin:

"Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening."

Yes, something interesting is happening, and it is causing banks and other financial services to rethink how they are doing business. Customers are embracing mobile and digital channels more and more each year, and to be successful, companies must deliver customer engagement via those channels. To personalize the customer experience and deliver timely, relevant offers that maximize customer profitability and loyalty, banks must be data-driven.

How can a bank become more data-driven?

Bryan Yurcan makes this point succinctly in the article mentioned at the beginning of this post: “The banking industry is increasingly competitive, with product development, delivery and consumer engagement all being driven by the need for a more mobile, social and data-driven experience. To this end, banking innovation needs to focus on creating a customer-centric business model and an infrastructure that is seamless to the customer.” Keep reading to discover five disruptive technologies spurring the need for banking innovation.

1. Online and mobile banking

In his article “More Americans making mobile banking a part of daily life,” Jim Marous highlights data from a recent study conducted by J.P. Morgan Chase & Co. and Braun Research. The data exposes the pervasiveness of online and mobile banking, a development from traditional brick-and-mortar branch locations. For example, 78 percent of Millennials used a bank’s website or online portal, with Gen Xers and Baby Boomers close behind at 75 percent and 67 percent, respectively. Furthermore, 35 percent are banking more online than they were last year, compared with only 16 percent who are visiting branch locations more frequently. The study also reveals statistics emphasizing the rise of mobile banking: 33 percent of survey participants are using their bank’s mobile app more often than they did last year. Millennials are, unsurprisingly, the top adopters of their bank’s mobile app, at 67 percent, but the majority of Gen Xers are also embracing the mobile app, with a 55 percent adoption rate.

2. Unbundling of banks by financial technology providers

As I mentioned previously, the battle for the customer interface is fierce. Hundreds of financial technology startups are unbundling banking and providing individual services for everything from loans to wealth management robo-advisors to credit checks. These popular providers include PayPal, Moven, Credit Karma, LendingHome and Wealthfront, to name only a few.

3. Expanded ATM capabilities

ATMs are getting smarter, and Americans are taking advantage of their enhanced capabilities with greater frequency. Indeed, it is becoming the new normal for banking customers to use smarter and smarter ATMs, circumventing bank tellers altogether. According to the study from Chase and Braun Research already cited, 70 percent use an ATM to view account balances and transactions. Nearly half (46 percent) use ATMs to transfer money from one account to another. And 64 percent use ATMs to deposit checks. As the study write-up states, “ATMs aren’t just for cash anymore.”

4. Peer-to-peer payments

Another area of banking that is on the rise is peer-to-peer payments. Barry Sommers, CEO of Chase Consumer Banking, provided a few quick facts about the increase in use of these new technologies at Chase, stating that “peer-to-peer payments are up 80 percent.” And more and more financial technology providers are focusing on peer-to-peer payments, including LendingClub, Venmo and PayPal. Even more newsworthy, social platforms such as Facebook and SnapChat have started paving the way forward for peer-to-peer payments. Because the global market opportunity for P2P payments is well over $1 trillion, this is definitely a space to watch.

5. New payment technologies

One of the buzzworthy topics of 2015, new payment technologies have dominated much of the marketplace discussion. Some of the highlighted topics of discussion include mobile payments, Bitcoin and the idea of the digital wallet. With the release of the Apple Watch, the wearable technology buzz received new life. People now have the ability to use Apple Pay via the Apple Watch to pay for everything from groceries to a new iPhone. But Apple is not the sole provider of mobile payments—Android users can also take advantage of this new trend via Google Wallet and the upcoming Android Pay.

When talking about disruptive payment technologies, one would be remiss to overlook Bitcoin. This form of cryptocurrency still has its place as a payment method, not to mention a topic of conversation in the banking and finance world. And if the recent TechCrunch article by John Biggs is any indication, cryptocurrency is far from falling off the radar now that Citibank is working on its own digital currency. New payment technologies are seemingly announced daily, and at the current rate of innovation, banks must take notice.

With disruptive technologies challenging the traditional banking model from every side, what can banks do? Mathews provides three pieces of advice for banks: “Become customer advocates...Become digital delivery platforms...Understand change is good.”

Help your bank become more data-driven