By Jade Bardai
As online competitors emerge, traditional brick-and-mortar banks try to adapt to changing consumers’ behavioural trends.
The same way the industrial revolution marked the modern era, the current business environment is experiencing a shift in technological and organizational processes. Traditional management tasks are either deemed no longer necessary or given to computers. Social media advertising tools are quickly replacing conventional marketing practices. Electric vehicles are growing their share of the automobile market. All these areas are experiencing fast innovation, yet banks seem to have trouble following that pace. With the rapid adoption of the Internet in the early nineties, traditional brick-and-mortar banks started implementing online services, but internet-only financial institutions are still relatively new. Some argue that the banking system’s size and complexity combined with heavy government regulations tend to slow down the innovation process in that sector.
It is common knowledge that an organized and easy-to-access consumer banking system is crucial for maintaining a healthy financial life. Even though the system’s internal processes – that is, offering a platform for the exchange of value – did not change much for several centuries, consumers’ behaviour definitely did. Thus, there is no reason why financial services should not follow modern behavioural trends as the automobile or advertising industries did. This phenomenon is now starting to be exploited by “fintech” companies (financial technology), as they believe conventional banks are the Kodaks of the 21st century. This brings up a question: do online banking companies offer the same service quality while meeting the modern consumer’s expectations?
To answer that question, a good start would be to assess a traditional banking group’s main goals regarding clients’ needs. Institutions that provide financial services – not necessarily banks – are useful first and foremost because of the protection they offer. In Canada, the Canada Deposit Insurance Corporation (CDIC) is there to insure eligible deposits – such as chequing and savings accounts or money orders – up to a maximum of $100,000 per depositor per member institution. Its American counterpart, the Federal Deposit Insurance Corporation (FDIC), is offering similar policies, but covers eligible deposits up to $250,000. In case of a bank failure – which is very unlikely but still probable, as recent history testifies – the Insurance Corporation pays insurance to depositors up to the pre-set limit. However, banks are not just huge bankruptcy-proof safes; they are also very useful for wealth generation because unfortunately, stashing cash in a cookie jar does not result in any return on investment.
What about online banks? The first internet financial institutions were actually branches that stemmed from conventional banks as a response to the changing needs of their clientele. Full-blown online banks only appeared after tech-savvy entrepreneurs realized that less infrastructure and other fixed assets meant less overhead costs, which in turn meant that they could offer more attractive interest rates and charge lower fees. These institutions are not only becoming more attractive because of the high-yield accounts they offer, but also because of new, innovative customer service techniques. For instance, BankDirect, ASB New Zealand’s branchless banking service, recently implemented a video chat system to directly interact with clients through mobile devices, reducing queuing problems in major physical branches. Accessing financial services is definitely becoming more and more convenient as the distance between a client and his bank account shortens, but is it as secure as it seems to be? Because fintech organizations are subject to the same government regulations as conventional banks, the same eligible deposits are covered by the CDIC. Additionally, increased ease-of-use and accessibility – through mobile devices, for example – has an advantage relating to security: it is easier to detect breaches, as the customer has access to their accounts in just a few clicks. Financial services startups generally tout superior data security guaranteed by complex encryption computer programs. However, this has come into question as regulatory bodies increase their vigilance over fintech companies. In early March, the US Consumer Financial Protection Bureau fined payments startup Dwolla for failing to live up to its claims of superior security standards, a move that was considered a first instance in fintech regulation. Indeed, financial startups’ gains in market share will be matched by increased oversight, which should result in improved data protection standards.
The internet has redefined the meaning of accessibility and flexibility that all consumers want in a fast paced world where time, if given back to the customer - is the biggest value in the life of John and Jane Doe’s financial services’ needs. -Dinaro Ly, Director of FinTech at MaRS Discovery District
Despite some entrepreneurs being reluctant to the idea of online financial services, many saw the trend coming and took advantage of opportunities in this sector, where startups have been proliferating during the last decade. The challenge for these businesses is finding their way through the hostile world of banking, still currently managed by a traditional, old-fashioned, financial system. This is why some organizations have made it their mission to help build an environment that is fertile to financial technology innovations, as is the case of MaRS Discovery District’s Financial Technology Cluster, an innovation hub based in Toronto that offers strategic services to fintech startups for free. The FinTech Cluster was launched in February 2015 as a response to changing consumer needs. As explained by Dinaro Ly, Director of Financial Technology at MaRS, “You need to ask yourself this question. Do I need a retail banking environment to accomplish any one of the following tasks: Deposit checks? Pay bills? Take out a loan? Invest? Or send money to friends/family? The short answer is no.” In fact, not only can one still obtain these financial services without the need of a retail environment, but one can also stop worrying about retail banking hours, given that mobile technologies enable access to these services twenty-four hours a day, seven days a week. “The internet has redefined the meaning of accessibility and flexibility that all consumers want in a fast paced world where time, if given back to the customer - is the biggest value in the life of John and Jane Doe’s financial services’ needs”, argues Mr. Ly. As a matter of fact, the numbers speak by themselves. According to the Canadian Banking Association’s 2015 report, 77 per cent of surveyed Canadians believe that banking innovations are saving their time by making banking quicker. As we move in an increasingly fast-paced world, the old adage “time is money” seems to make a lot more sense.
Should traditional banks feel threatened? The fintech industry is often portrayed in the media as being disruptive to conventional banks. However, financial technology companies often complement the services offered by big banks by providing customers with platforms that fit their changing needs. Additionally, several of Canada’s Big Six banks have entered partnerships with both startups and innovation centres, such as MaRS. However, according to a PwC report on banking in Canada, big banks’ complex structures might hinder their ability to adapt to individuals and small business owners’ demand for new, innovative and faster ways to deal with their financial lives. It all comes down to who will listen to that demand and adjust accordingly. Because of the increased accessibility and reduced costs fintech companies offer, this emerging area of the banking services sector will definitely play an important role in meeting that demand for innovation. Thanks to new technologies, companies like PayPal provide a worldwide online payments platform that enables customers to make transactions without having to leave the comfort of their homes. Customers can now discuss about financial services with their banker using video chat systems, like the one implemented in New Zealand by BankDirect, one of the pioneering online banks that only operate via Internet and phone. Cryptocurrencies like Bitcoin or Auroracoin, which can be stored in electronic wallets (hardware or software) and traded for conventional currencies, can now be used as an online medium of exchange. Smart investing is now made easier using big data analytics and predictive modeling technologies, as proven by Delphi, a cloud based predictive modelling fintech platform providing statistical tools that are less expensive than usual software and require less knowledge of computer programming. Other services offered by financial technology startups even include life insurance, corporate banking, retail banking, and the list goes on. To sum up, Mr. Ly states that many factors seem to be showing that financial technology is the future of banking, such as significant rises in Canadian venture capital investments in fintech, for instance. Whether traditional financial institutions want to be part of that future ecosystem is completely up to them.
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