Suparna Goswami Bhattacharya

June 29, 2015: The one industry which has gone through a sea of transformation in the last decade is the financial industry. It all started with the opening up of ATMs and the addition of online banking option. And now, the physical bank may not exist at all for the concept of online-only banks is fast catching up in countries like China, US and UK.

Basically, financial institutions opting for branchless banking will not have any kind of physical presencein any of the markets. However, they can offer all standard retail banking products, including current accounts, credit cards, savings accounts, personal loans, insurance and mortgages.

With the cost of managing a physical branch increasing and banks struggling to remain profitable, the new entrants in the space are trying their best to disrupt the way the industry functions. In US, Atom Bank, Ally Bank, Bank5 Connectare all internet-only banks with a focus only on smartphone interface. Similarly, in China we have WeBank, which has launched its online-only banking services, while Huangzhou-based MyBank will soon launch a similar service. In fact, the usually conservative China Banking Regulatory Commission has given its nod to these new lenders.

Over the past decade, online banks have established a significant and growing presence in the consumer deposits market. In the UK, First Direct, an internet-based retail bank, has around 1.25 million subscribers while in the US, the Ally Bank has just under 1 million users. Even in Japan, these banks have gained traction.

So what exactly has lead to a spurt in demand for online-only banks when traditional banksoffer online services as well? Though the large traditional banks still control the majority of market share globally, thenew entrants —online-only banks and online lending platforms — are growing quickly and starting to see broader acceptance with better products and more focus on customer service. Lower cost base, similar product portfolio at competitive rates, services tailored specifically to online only engagement are some of the factors leading to growing presence of such banks. In the US, for example, online only banks typically undercut traditional banks on maintenance fees.

“I’d argue that the recent banking scandals, in which the reputations of many leading banks took a hit, creates an opportunity for new, agile online-only players who might be perceived as offering a new approach,” says Windsor Holden, Head of Forecasting & Consulting, Juniper Research.

For online-only banks, with no expensive branches to manage, operating costs are lower and, hence, more profitable. US-based Ally Bank has enjoyed annual double digit growth in both retail deposits and customers, recently surpassing $50 billion in deposits. “Our lower operating costs allow us to pass the savings along to customers in the form of competitive rates, products and services. This customer-centric approach has been a factor in our leading position in the marketplace and overall growth,” says Diane Morais, President and CEO, Ally Bank.

In fact, these banks rely a lot on analytics to improve customer experience. “Removing the physical branch is only the beginning.  True value is driven by better analytics and technology that allows you to cater products for specific individuals and provide a better experience than one in the branch,” remarks Al Goldstein, CEO, Avant, a Chicago-based startup which provides online personal loans. The key is to create real time processes and transparency to empower the consumer rather than forcing them through cumbersome steps (online or brick & mortar), says Goldstein.

These banks realise that convenience is important to customers. “In addition to the latest digital technology for phone, tablet and computer that allows customers to conduct banking activities at anytime from anywhere, we offer live 24/7 customer care via phone or web chat,” says Morais.

So, will all banks go this way or are online-only banks just a wave that will soon lose its force? Even the most optimistic of the lot agree that there is still time till these banks completely replace the traditional ones. “Over time, we will take a massive amount of market share from traditional institutions.  I would predict 50% over the next 10-20 years,” says Goldstein.

“Feasible, yes, but not for decades. You need to provide engagement channels to cater to all your customers. If you remove physical locations, you run the risk of seeing your customers churn elsewhere. In Western markets, I’d say it’s highly unlikely to occur before most of those who predate ‘Generation Y’ – and who have less of an affinity with digital channels – have passed away,” remarks Holden.

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Financial services is a term used to refer the services provided by the financial market. This term is also used to describe organizations that deal with the management of money. Some of the prominent examples include Banks, Insurance companies, Credit card companies and Stock brokerage firms.  Financial services are not limited to the field of deposits and investment services but also present in the fields of real estate, trust’s and agency services. As Financial service organizations are seeking to become more innovative and entrepreneurial they are adopting new technologies to increase their efficiency and provide satisfaction to their consumers. Banks have now started to invest in technology. As a result, new banking applications and capabilities are helping to develop a competitive advantage, reduce costs and achieve efficiency and customer satisfaction. The integration of data and technology to help customers to manage their money in a better and quicker way and the use of newer channels such as mobile devices and social media will help to deliver banking services as and when customers need them. Continuing advances in technology will allow the financial services industry to deploy increasingly complex and high end analytics to help clients to make them more informed investing decisions. Innovations such as cloud computing will help  bring a host of benefits to the clients from automation and capacity on demand to accelerated time to marketing real time data infrastructure and strengthened client service. Use of latest technological advancements provides a window of opportunity for financial institutions to elevate business performance and gain a competitive advantage.  Juniper research estimated that worldwide mobile payment volume would be an incredible $ 240 billion this year. The use of technology like portal and content management tools help in improving efficiency, reducing call center traffic, knowledge sharing and incorporate enterprise social network.

Mobile banking for example has become a regular delivery channel and customer touch point for banking services. Forrester, a global research and advisory firm predicts that the total number of U.S. adults who use mobile banking will increase from 10 million to a whopping 50 million by 2015. This growth will see a shift in mobile banking adoption percentages to a new high, and make the channel a top priority for banks as they continue to add more functionalities and newer features in their mobile banking solutions.  The personal finance management tools (PFM) are also being placed in a prominent place in the online banking site so that customers get to know about what new services are available. Regions bank, which has rolled out its PFM tools earlier this month, is one institution which is trying to make PFM online work in tandem. Projects involving core processing, online banking and mobile banking are also in the queue.

Impulse source, a Boston based personal finance company, announced on Thursday that an e-commerce plug in for Google Chrome web browser lets user transfer money into the saving goals when they are shopping on more than 50 e-commerce sites.

Driving factors for the use of technology

Some of the driving factors for the use of technology in financial services industry are faster information greater transparency and improved risk management.   All these factors collectively have paved the way for the need of a new business and IT model in financial services industry.

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