People haven’t been willing to change their banks. It has been a lot of paper work, and if you have a mortgage or other loans, it becomes more complex. People are also conservative with their money and hesitate with new, unknown banks and services that have no branches on the street. But is this finally changing, are people go after better usability and services?
It always takes time for people to change habits of a lifetime. The bank relationship is one of those inherited relationships, where many people still use the same bank as their parents used to. Banks are big black boxes, they have all kinds of services and instruments from normal accounts and home loans to investments instruments, derivatives, and investment banking services. Maybe their enhanced product range has also helped to retain customers.
Regulation for banks has become much tighter since the finance crises and terrorist threats. Know-your-customer (KYC) and anti-money-laundering (AML) regulations have made things more complex for normal customers. Especially so for people and companies that need international services. What seems to annoy customers most is that their few-thousand-dollar-monthly transaction accounts have almost similar regulations to those who move billions.
There are already quite a few digital neo-banks (banks without any branches) that also handle KYC and AML requirements in a few minutes on a mobile without any paperwork. Most are still relatively small and many people have them in ‘test use’, only to move some money there and test mobile payments and other new things.
Now we start to see evidence that the situation is changing. People are more confident to use new digital banks and their services have also developed. Revolut and N26 are big digital banks in Europe and they have already over two and one million customers respectively. Three million people in EU is still a small number, but it is already a critical mass in some early adopter segments.
Transferwise has offered cost effective money transfers for years. Now they also offer bank accounts, for individuals and businesses, with many currencies. It’s easy to open an account in the Internet and handle all things globally in one place.
My point is not to market these services, but I have followed this market for years, and personally have also many international payment needs and for our companies that operate globally. I also seriously consider if it makes sense to pay higher prices and waste time for much more complex services with traditional banks. Especially when this involves opening a business account online in five minutes and getting confirmation two days later, or having to visit a branch a few times, collecting all kinds of certified documents and then waiting for weeks for a decision.
Basic accounts may be easy, but people and businesses have other needs, too. Now we also see more and more lending services that actually offer competitive interest and different kinds of loans for different needs. Usually the process of making an application is much easier. There are also digital investment and wealth management services.
Of course, some parties, including traditional banks, challenge these new banks and finance services. They can question, for example, their regulatory compliance. But they forget that technology and data analytics offer much smarter ways to handle these things. Old banks use their old models to ask for all kinds of papers, but they are still caught out laundering billions and then say didn’t notice anything (or Danske Bank that had $200 billion of unclear transactions in tiny Estonia). With any smart analytics you can also detect unusual things and check things online from many sources. If they would simply use smart solutions like those used for credit card fraud detection, they could catch many cases, and AI is developing all the time. And for $200 billion in Estonia you don’t really need any smart analytics, it is enough, if you keep your eyes open and seek out irregular transactions.
Better data and better analytics also help make better loan risk evaluation, including better pricing of loans in the secondary debt markets. It also helps to offer better investment and wealth management advice. The time of those wealth managers whose core competence is to offer lunch and dinner will soon be over.
It is no longer complex developing these services. There are numerous finance IT back-office and finance engines available as a cloud service, that allow finance companies to focus on the core business. Availability of these technology services is one disruptor for the market.
It takes time for people to accept new things and they must be sure there is no risk for their money. The network effect will also be important in financial services. When we reach a critical mass, changes will happen very rapidly and people will move from old banks go after better services from new finance service providers. In the emerging markets people will go directly to these new services. It is hard to say, if big changes will happen in the mainstream in two, five or seven years, but it will certainly happen within the next ten years. As my banker friend said, we are approaching “the Kodak moment”.