The digitalization of the banking world is in full swing and has become one of the most widely discussed topics in the media. Fintechs, the new players in the sector, are forcing their way into the market with innovative products and services and putting the established banks under pressure. Although the fintech sector is (still) tiny in comparison with the traditional banking industry, many believe that it has huge potential to revolutionize the banking world. This trend could turn out to be an opportunity both for clients and for the financial markets.
It seems that banks have not been paying sufficient attention to the new client requirements and technologies for a long time. This may be because the financial crisis and the regulatory environment have been eating up a large amount of their resources. Whatever the reason may be, their tardiness has given the new players a chance to enter the market and win over clients with innovative solutions.
Digitalization of banking services
Fintechs offer practically all the services that traditional providers do, as well as a host of others, from mobile payment systems to mortgages and loans to cryptocurrencies such as bitcoin. Information and comparison portals also employ digital business models, thus contributing to the digitalization of the financial sector.
Digitalization has mainly affected areas in which personalized advice plays a secondary role and automation and standardization are easy to implement. This is primarily the case in retail banking, where digitalization is likely to have a maximum impact over the medium term, putting business models and client solutions under pressure. Wealthy and demanding clients whose extensive, diversified portfolios often involve significant amounts of advice will continue to consult their trusted bank. For them, digital solutions are merely an addition to the traditional banking relationship.
Client focus is key
The banks are fully aware of the opportunities and risks of digitalization and are likely to invest more in developing their digital offering over the coming years. Additional investments are urgently needed because the fintechs are more agile and dynamic than the traditional banks and are quick to bring new solutions to market. The fintech sector may still be in its infancy, but it could revolutionize the banking world.
This does not necessarily have to be at the expense of the banks, but it depends greatly on their actions. The options for responding to the new developments are many and varied. There are various conceivable strategies which the banks might adopt, such as copying fintech solutions, cooperating with fintechs on the joint development of products and services or even acquiring fintechs and integrating them into the bank. The main key to the bank’s success will be the client experience, however.
A question of trust
For consumers, the upheavals in the banking world are good news – for the time being, at least. Competition is known to stimulate business and bring down prices. Despite this, a number of hurdles are stopping consumers from using the new products and services. For consumers, the key question is likely to be whether they can trust the new providers enough to give them their sensitive data.
Suitable conditions are essential
If the Swiss financial centre wishes to remain successful, the banks must refine their offering in the interests of the client and take into account technological change. At the same time, the onus is on the regulator to ensure fair competition between all players in the financial sector. This means avoiding market distortions such as the promotion of certain provider segments or technologies while also setting the barriers to market entry for new providers at such a level as to strengthen the financial centre’s capacity for innovation.
Furthermore, the regulator must ensure that regulations on investor protection and combating money laundering apply equally to all providers; at the end of the day, innovation in the financial sector must not be to the disadvantage of the consumers. The Federal Council has taken a big step in the right direction by changing the Swiss Banking Act. It remains to be seen in practice whether the new regulations will meet everyone’s requirements.