Banking on disruption to keep bank customers

Historically, traditional banks believed their captive customers, relatively strong balance sheets, compliance expertise and distribution were high-enough barriers to stop material impact from insurgents.

This is no longer the case.

Firstly, the incumbents cannot ignore the vast swathes of funding flowing into the challengers - digibanks such as WeBank, KakaoBank, Timo and MyBank - and this is only set to grow exponentially this year.

Secondly, these challengers are gaining traction with millennials, who are in favour of propositions that are simple yet beautifully designed and transparently communicated and delivered. Lastly, the introduction of new licensing regulations aimed at levelling the playing field has also played a role in initiating this paradigm shift.

What is happening in Hong Kong with new virtual licences is particularly interesting. Such licences are creating opportunities for the Chinese tech giants, fintechs and banks to change the rules of the monopolistic game.

Licences will be granted soon and the impact to banking could be profound, especially considering the number of non-banks rumoured to have applied.

We are starting to see fintechs and tech-first companies from adjacent verticals move into banking; Grab, Paytm and Transferwise are examples.

There are three types of "challenger banks" disrupting and evolving the banking model - the scaling digibanks building out their retail propositions in Asia and expanding into adjacencies such as banking-as-a-service; the tech giants leveraging their core customer base to move into financial services; and incumbent banks launching digital-only subsidiaries.

The tech giants are moving into banking, leveraging their existing customer base (Ant Financial, Wechat, JD Finance, KakaoBank, Line, Grab).

They are exploring new commercial models with a move away from fee-income-based models, focusing instead on data acquisition, cross-selling opportunities and ways to add value to core business models.

Building on new tech stacks that are open and API-based is providing a source of competitive advantage. Most are experimenting with new tech to provide greater efficiencies in delivery and greater customer experiences. A focus on frequency and value of interactions with customers is the major difference.

Some incumbent banks are building new subsidiaries that are digital-only banks to reduce cost base involving customer acquisition, IT infrastructure and so forth, provide enhanced offerings to customers, future-proof their business and seamlessly comply with regulatory requirements.

The goal is to compete with the tech giants and, to a lesser degree, fintech start-ups.

Start-up banks are offering retail banking propositions and slowly expanding their offerings across borders and also into the small and medium-sized enterprises segment.

These banks are desperately trying to build scale and profitability and most have struggled to do so in retail banking.

These players are now developing platform strategies for stronger value propositions through connecting third parties to deliver financial products for existing customers.

The incumbents are fielding brand new teams and injecting new tech talents, but this is still nascent, with traditional mindsets prevailing.

The successful creation of a new digital-only bank would ultimately cannibalise the core business, so these players still have a political and cultural mind field to navigate.

But millennials are fickle. The question some might face is: How long would it be before the VC money runs dry or an economic downturn takes place?

No doubt there are challenges all around and the implications are huge. These players must focus on three key strategies:

-Increasing the touch-point with the customer and measuring this as daily active use and smart interactions;

-Retaining deposits in current accounts (as liquidity that banks rely upon); and

-Evolving the operating model to scale (reducing the cost of customer on-boarding and service provision).

The writer is global content director at Money20/20.

This is an edited version of an article that appeared in The Business Times yesterday.