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The second change catalyst is regulation, which has traditionally protected banks from competition. As a result, many of the post-crisis regulations are tailored specifically for the largest institutions. The third change catalyst is trust — the ultimate barrier deterring new entrants to the banking industry. This is not as counterintuitive as it seems. Banks may not be liked , but they are still deeply trusted. There is a unique emotional trust between a customer and his or her bank, a relationship so strong and so embedded in our everyday lives that most of us never question it.
Nevertheless, that trust is now eroding — especially since the financial crisis.
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Now customer trust is shifting from traditional financial institutions to the tech giants. In the not-too-distant future, once millennials and tech-oriented consumers become the majority of our customer base, disruption will cease to be a threat. It will be a fact. Today, some banks are embracing mobile technology to deliver groundbreaking banking solutions that millennials and other tech-oriented customers expect from their service providers.
At the same time, leaders at other banks still believe that the traditional branch network is their main competitive advantage. The banking industry must realize that honing the current model is not enough.
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By continuing to focus on improving existing products and services relevant to the most demanding and profitable customers, incumbents commit to higher profitability in the short term. New industry players, meanwhile, could identify the needs of overlooked customers and then deliver services and products suitable to their tastes, at a lower price.
This digital transformation in the banking industry will also bring about huge positive social change. Digital banking will not only drive new, better, transparent and personalized banking services at lower cost, it will also enable the financial inclusion of underbanked populations. Banks can utilize digital technology to create innovative platforms that promote equality and greater individual financial sustainability. In this transformation, the main challenge for the leaders of the banking industry is managing the change by overcoming internal resistance, tolerating the risk of failure and avoiding the temptation to focus on the short term.
This requires clear vision and strong ambition. We have reached the end of banking as we know it and the choice for the industry is clear: We are either the disruptors or the disrupted. For reprint and licensing requests for this article, click here. Login Subscribe. Now Reading: The Latest. Adobe Stock.
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More from American Banker. June The individual may not understand how or why the intelligent service is doing all of these things, but he or she knows the actions are completely in the service of improving his or her life. Imagine a scenario where a person ports their entire financial profile wherever they want it.
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With the push of a button, all of their accounts are transferred from one place to another, much like porting a phone number. The cellphone industry, for example, fought very hard to prevent the porting of numbers because not allowing it created stickiness. In , when the government forced the industry to allow the porting of phone numbers, cellphone plan prices went down. Excess profits evaporated when this friction was eliminated.
Automation allows optimizations to happen at zero marginal cost. This is a nightmare scenario for banks: Once automation reduces enough friction in the financial industry, banks lose their relationships with customers. They become a utility; a provider of pipes and wires that allow money to be stored and moved from place to place.
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Then, specialized fintech companies swoop in and use their data expertise to make decisions for people and execute on those decisions. The end result is an invisible, intelligent service that figures out everything for the customer and does it for them. Figuring out how to weave intelligent automation into a product experience, a manufacturing process or a product development process is crucial to growth and success for fintech companies. Those that fail to recognize the changing technological landscape run the risk of losing their market share and their position in the marketplace.
Jason C. Brown Contributor.