Bill Murray, senior researcher and advisor at Leading Edge Forum, discusses how the digerati have become competitors to banks and what to do about them.
The digerati are taking bites out of the banking sector, offering payment services, loans and credit, cash and savings products to the under-banked. Amazon is increasingly referred to as a ‘tech banking’ firm. Amazon Pay has evolved to include a digital wallet for customers and a payments network for both online and brick-and mortar merchants. With Amazon Go’s “Just Walk Out” technology – It will grant access to the store and allows customers to grab-and-go without needing to physically check out to pay for products.
Amazon Cash fits neatly into Amazon’s strategy of appealing to underbanked and unbanked populations, allowing users to deposit to their
Amazon.com balance by showing a barcode when paying cash at checkout locations, so they can shop at stores without a bank card. A partnership with Coinstar kiosks will extend Amazon Cash’s reach into rival stores. Amazon Lending offers its online sellers loans to cover working capital at rates that are typically less than a credit card. It also services the consumer market with store, debit and credit cards. The Amazon Reload digital debit card has features that challenge credit cards. Amazon is offering Finance-as-a-Feature.
This rapidly growing phenomenon of “tech banking,” where eCommerce giants provide financial services, was born of three effects. First, the financial crisis, which had an adverse impact on trust in the banking system. Second, the spread of mobile devices, which reduced the advantages of physical distribution that banks previously enjoyed. Third, the demographic shift to millennials, who are more open than the older generation to financial services from non-traditional financial services firms.
Established banks make small or negative margins on serving most small businesses, so they cherry-pick customers, creating an under-banked market. Now that sophisticated analytics is mainstream, lending and payment opportunities are moving to the firms that have the best data on customers. That used to be banks, but now it is eCommerce companies – digerati – like Amazon, Alibaba and PayPal, whose payment processing capabilities can underpin ‘tech banking’. Their customer data is more relevant, granular and timely. They can see minute-by-minute metrics, cash flows, shipping profiles, product accuracy and customer satisfaction. Best of all, clients who have credit lines with these firms spend more than those who don’t, so even low-margin tech banking is worth it.
The Digerati are cleaning up
The digerati are eating into the traditional banking market at a scale any fintech organization would die for. Net interest income constitutes the majority of revenues in the banking sector, and this is where Amazon stands out compared to most of its tech counterparts. From launch in 2011 to June 2017, Amazon reported it issued $3B across 20,000 business in the US, Japan, and the UK. The bulk of growth in the last year has been to businesses in the US, where the company originated $1B in loans in 2017 alone. Amazon Loans has enabled SMEs to grow sales by an estimated $4 billion. More than 20,000 small businesses have received a loan, and more than half of those have taken a second loan from the company. Loans range from $1,000 to $750,000 with interest rates between six and 14 percent. Amazon Payments, with 33 million users in 170 countries, is catching up to credit cards, and PayPal is already ahead of Apple Pay, Google Wallet and the rest. Patents indicate that Amazon is thinking about the future of payments in terms of facial identity and selfies as a means of quickly paying. Payments is an efficiently served market, but not to a challenger with Amazon’s superior levels of efficiency, product integration and customer engagement.
But the Asian digerati are ahead of Amazon. Ant Financial, the finance arm of Alibaba (and formerly known as Alipay), is valued at around $60 billion. It offers payments, personal lending, banking products, savings products, and peer-to-peer lending.
Alibaba’s four-year-old Yu’e Bao fund, a repository for leftover cash from online spending, is the world’s largest, with $165.6 billion under management. Ant Financial moved into fund management when it spotted the growing piles of cash in its customers’ accounts that are used to pay for everything from coffee to taxis to fridges. By sweeping the money into a money market fund, Ant Financial is able to offer a return on surplus funds better than the banks. Customers have responded by taking their money out of bank accounts and placing it in their Alipay digital wallets.
In theory, the next step for any of these organizations would be to acquire a banking license, and the quickest way for them to do that would be to buy a traditional bank. Not only would they get the license, but they would be buying a customer base that could bring a significant credit card portfolio. Owning more of the card payment’s value chain would provide them with an opportunity for cost reduction and even more data about customer behaviour – a vertical integration play in card payments. They would also get the capability to manage the deposit base they have already accumulated. However, it is less likely that Amazon is building a bank than focussing on building financial services products that increase participation in the Amazon ecosystem.
Banks do not need to fear being different
Banks have significant advantages over would-be competitors. A bank is highly regulated; it holds a grip on credit issuance and risk taking; banks are by far the biggest repository for deposits (which customers still mostly identify with their primary financial relationship); they are still the gateways to the world’s largest payment systems; and they still attract the bulk of requests for credit.
The tech bankers know how to win in a digital world, but traditional banks with their legacy loan books, branch networks and systems can win, too. It’s about how to utilize those assets alongside advanced digital capabilities to outmaneuver the tech bankers: product innovation, technology innovation, relationship change, incubate, partner, venture, acquire. These are all possibilities, but only by taking a measured approach to understand the value that exists within those assets already.
Banks and other financial services firms are systemically important to society, which is one of the reasons they are regulated so highly. However, they fall short of meeting the financial services needs of the underbanked, which are whole sections of business and society. The ‘tech bankers’ are increasingly meeting those needs, albeit to drive up participation in their own ecosystems. As banks look to shore up profits by diversifying they will inevitably compete with the tech bankers, but they can’t do that by copying them; they will have to out innovate them.
About the Author
Bill Murray is a Senior Researcher and Advisor for Leading Edge Forum. His IT career spans over 30 years, with 16 years as a Founder and Partner of Differentis, providing strategic IT consulting services to many industry sectors. Bill has experience of developing Digital and business technology strategies, business cases and change programmes involving technology disruptions such as consumerization, analytics and cloud-based services. Most recently, Bill has been helping clients develop IoT enabled business propositions and services in Connected Health, Connected Insurance, FMCG and supply chains, and advising on IoT platforms.
Bill is a chartered engineer by background and started his career with Arup in high energy impact analysis in the nuclear and automotive industries.
THE CO-BRAND CREDIT CARD MARKET – SINK OR SWIM
By Chris Vinnicombe, VP Financial Services at Acxiom
The co-brand credit card market is the result of the partnerships between many of the world’s largest credit card issuers and consumer goods businesses like airlines, hotels, and retailers. By leveraging existing technology investments in digital, data, and analytics, the co-brand credit card market has attracted affluent consumers over the years. Indeed, it has remained a powerful component of retail loyalty programmes and strategies that generate revenue not only for the issuer, but for retail partners as well.
The market today
Historically, rewards have been critical to retaining and attracting consumers. However, businesses are increasingly finding that this benefit alone is not enough. In today’s world of data, one-size-fits-all loyalty programmes show little customer intimacy, since they don’t pay attention to individual attitudes, behaviours, and expectations.
Co-branded credit cards have faced competitor pressure to sweeten the rewards pot to draw customer traffic and differentiate their card programmes. Above that when consumers around the world are used to relevant adverts, offers and suggestions, the market increasingly seems out of touch when the offers don’t hit the mark.
It is now time for credit card companies to take a hard look at their proposition to determine which offerings consumers still value and to create benefits that are digital first, easy to use and truly relevant to how they live.
Increasing cardholder engagement
Today, engagement has become a significant part of this challenge. Cardholder engagement is critical in the market since it measures who has an active relationship with their card, rather than those where it sits unused at the bottom of a draw.
One of the issues is that many cardholders feel they are of little interest to the card issuer after starting the relationship. When offerings remain the same and don’t reflect consumer lifestyle changes, it leads to a decline in spend and balance activity.
For example, if a person is consistently purchasing long-haul, luxury summer holidays on their card and receiving a reward of discounts on Christmas staycations it just won’t be claimed. Ultimately, if the user isn’t likely to claim a reward it defeats the whole point of user offerings in the first place and will lead to a decay in the relationship over time.
To change this dynamic, card issuers need to focus on becoming far more customer-centric, addressing pain points, fulfilling desires and engaging with the consumer as an individual. Whether they are frequent travellers, trend setters, have an affinity to luxury products, cash back collectors, etc. Keeping up with interests and offering tailored rewards will create a more personalised experiences for customers and increase loyalty.
Customer experience – reach for the skies
A key example of this is the airline sector. Co-branded credit cards play an important role for airlines and their card issuers, each of which benefit from credit card engagement and purchasing behaviour. The cards also play an integral role in frequent flyer programmes, helping drive flyer loyalty.
Nowadays, airline customer interactions can come through many channels like customer service centres, online travel agencies, websites, and more which can create a complex ecosystem of customer data. The co-brand card partners see significant transaction data that identifies travel activity and purchasing patterns that are strong triggers for airline marketing programmes. All these interactions generate crucial information on passenger needs and preferences that enable up-sell/cross-sell, pricing and preferred experiences (i.e. early boarding or flight update notifications).
For the co-brand credit card market to work, partners need to work together seamlessly. Sharing customer information is vital to the interwoven marketing capabilities needed to be successful.
It all starts with the data foundation. A shared space for data to be safe provides a privacy-compliant environment that allows marketers and partners to connect different types of data while protecting and governing its use. This is the bread and butter for people-based marketing that enables partners to engage consumers across today’s highly fragmented landscape of channels and devices.
These data safe havens provide the ability to ingest customer records from partners, as well as core campaign and engagement logs used where businesses can measure and analyse success. This data can also be enhanced by third-party sources (demographic data, propensity models) to enrich the view of the consumer and create new insights to support new audience creation for marketing programmes.
However, organising, managing, and deriving insights from large sets of consumer data is complicated. To overcome this, companies should rely on connectivity solutions that integrate data to provide a single view of the customer. These identity resolution services resolve first-, second-, and third-party data, exposure and transaction data to represent real people in a privacy-compliant way.
Having this omnichannel view of the consumer can then be utilised to support consumer targeting, personalisation, and measurement bettering the offering to the user and maintaining relevance in the customer’s wallet.
Ultimately, data is helping the co-brand credit card market to stay relevant to consumers today. It is no longer enough to offer one-size-fits-all rewards to card users as competition in the industry hots up. Increasing customer loyalty and engagement is name of the game and using data from across both partners is helping firms to be more competitive, responsive and personalised than ever to drive new business uptake while keeping existing customers coming back for more.
FOUR WAYS OPEN BANKING AND AI WILL REVOLUTIONISE ACCOUNTANCY
Ed Molyneux, CEO and co-founder of cloud accounting software company, FreeAgent
It’s been just over two years since the term Open Banking became a tangible reality in the UK. Since then, the nine largest banks and building societies in Great Britain and Northern Ireland have signed up to take part in the initiative, meaning they must allow regulated businesses to access their customers’ financial data, as long as the customer has provided permission.
Open Banking was imposed by the Competition and Markets Authority to spur competition between banks and make customers’ banking information more accessible to third parties. And this phenomenon has already been transformative for accountancy, providing third-party financial service providers standard ways to access consumer banking transactions, and other data from financial institutions – a seamless alternative to the teetering piles of paperwork traditionally associated with accounting. Paired with other new innovative technologies, including artificial intelligence (AI), Open Banking has the power to change the day-to-day lives of accountants and more broadly, the world of finance.
This article examines the fundamental ways Open Banking and AI can and are already being utilised by accountants.
Real Time Insights
Through the use of Open Banking, accountants can have real-time access to their clients’ most up-to-date banking data every single day. This means no more chasing clients for the necessary information that you need to do your usual day-to-day work. This also benefits your clients, as they can continue with their daily workload knowing that their bank transactions are being shared with you directly, accurately and automatically. Suddenly their do-list looks a bit shorter!
Traditionally, accountants have had to deal with an enormous amount of paperwork, including invoices, expense receipts, bank statements and other important documents. Combined across the profession, this amounts to mountains of paper that have to be analysed and filed. One of the greatest benefits of technology and digital accounting is that it alleviates the stress of keeping important information in physical files. As well as less mess in the office, this means invoices, expenses, receipts can be kept in one place – online. This enables accountants to be more efficient on a day-to-day basis as they are able to easily find documentation by simply typing in what they are looking for to search for it.
Luckily for accountants, and also for the environment, Open Banking and cloud software platforms ensure that important data can transfer seamlessly and safely between your bank and your financial accounts. Already, cloud accounting software makes it possible to have one tidy dashboard that gives an overview of the business in its entirety. As well as being the guardian of files, using technology to set up a bank feed will allow accountants to track incomings and outgoings, link invoices and payments and view interactive charts of all their clients’ accounts.
Working from anywhere
The last five years have seen the progression to flexible working increase significantly. Millennials in particular have a desire to work out of the office. A survey conducted with over 19,000 working Millennials across 25 countries revealed their top five priorities when looking for a job, with 79% stating flexible working was a must. Further analysis from BBC 5 Live revealed a 74% jump in the number of people working from home between 2008 and 2018.
As well as the natural increase in the number of people working remotely, accountancy is one of the many professions being affected by the current turbulence being caused by the Covid-19 virus. This month, the government announced everyone should work from home if they can. Now, more than ever, people are away from the traditional office space and working instead from the confines of their own home, with technology acting as the glue that in many cases is keeping their business together. For accountants this means remote access to financial data is an absolute essential.
Add consultancy to the equation
With more efficient processes and easier methods of making and tracking transactions, technology and Open Banking will ultimately free up a whole lot of time for the accountants. Clearing up the calendar will make room for new kinds of work and enable accountants to spend more time on consultancy and value-added services, where previously these may have been perceived as a bonus service or from the client-side, a service at a much larger additional cost.
As well as consultancy, these technologies will have other, less direct impacts on the client-side. For example instead of needing a shoebox full of receipts, Open Banking and AI will lead to more confident and self-managed clients. If a client is keeping accurate books themselves, then the accountant no longer has to do all of the numerical admin. Rather, the value add lies in providing higher-level insights around the numbers and offering useful advice such as “it is time to put your prices up, as your profits are lower this year“.
Ultimately, AI and Open Banking are opening the gateway to a more efficient and effective accountancy industry. While benefiting the clients by making new space for consultancy and added value services, new technology ultimately streamlines an accountants’ entire job. Because they are constantly dealing with stacks of financial information, the consequences of misplacement of one document or inefficiently tracking systems hold higher stakes than usual. Luckily there is no need for accountants to grapple with old-school methodology anymore as AI and Open Banking are already readily available and at their fingertips.
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