By Madhur Kumar Jain, Senior Vice President and Global Head of Solution Consulting, SunTec Business Solutions
The move of Big Tech companies into the financial services sector brings both risk and benefits to consumers and banks alike. Technology firms such as Alibaba, Amazon, Facebook, Google and Apple have grown rapidly over the last two decades. With a data centric business model focused on direct interactions with a large number of consumers, these firms are using their power to venture into the financial services sector, offering payments, money management, insurance, lending and much more.
For these firms, financial services may still only be a small part of their business globally (11% according to Leonardo Gambacorta, head of innovation and the digital economy at the Bank for International Settlements) but the potential is huge given their size and customer base and they will continue to fuel rapid change in the financial industry. With their fiscal capital, customer data, strong brand loyalty and presence in consumers’ everyday lives, big tech companies have the firepower to drive innovation, and in doing so, pressure the traditional banking model further. So how can banking as we know it, survive the onslaught of tech companies and what do they learn from them?
The answer lies in co-operation and partnerships
According to a KPMG report, 26% of financial institutions are already partnering with one or more technology giants, and an additional 27% report planning to forge such partnerships within the next 12 months.
Big Techs derive their strength from the fact that they have deep expertise in analytics, big data, AI and creating customer centric experiences, which in turn help them to develop services that reach their existing users in no time through their channels.
But the thing to note is that the banks have an advantage in a few areas over the Big Tech companies – their ubiquitous presence in every aspect of life of its consumers (compared to siloed but in depth experience of every individual Big Tech company); the consumers’ trust in banks for all financial matters and the vast experience they have in the industry.
This scenario makes for many opportunities of partnerships between banks and Big Tech companies globally for example, Apple recently launched a credit card with Goldman Sachs. Last year, Australian lender, Westpac partnered with Assembly Payments to launch a payments platform for its business clients. In China, tech companies are influencing how consumers spend their money with mobile wallets from Alipay and WeChat Pay. With the drive to adopt Open Banking by banks and fintechs, the potential for partnerships and innovative product offerings are becoming increasingly possible.
Embracing Open Banking
Open Banking helps banks advance their features to meet consumers’ changing needs, enhance their revenue and at the same time increase customer engagement using differential and personalized experiences. By treating personalized propositions as a commodity, banks can begin providing the personalized customer experience that helps retain customer loyalty. Banks can also go beyond their typical scope, increasingly becoming links in the value chain, for example, to help customers buy a vehicle rather than just give the loan. Leveraging customers’ data with the offerings of an agreement will give banks the opportunity to build business beyond their traditional financial products and actively look at integrating third party trusted products to deliver value to the customer
Partnerships like this can help commercial banks become more inventive and nimbler, digitizing their processing, systems and customer experiences to create new ways to meet the needs of their customers and form new income streams. With Open Banking, the banks’ partnership with fintech companies and other third-party providers is driving technology innovation to help traditional banks stay atop in today’s digitally-centered world.
Winning the digital race
As banks embark on their digital transformation journey in an effort to hold onto market share and capitalize in the digital economy, the industry will need to reinvent itself, driving the creation of more customer oriented, hyper-personalized services. Banks will increasingly become links in the value chains that will also contain non-financial services, meaning suppliers will join their digital ecosystem to offer a one shop stop for customers banking and other needs.
A fundamental change in the financial services sector is taking place as banks begin applying strategies to stay ahead of the curve. Financial institutions are prioritizing digital transformation of their ecosystems to achieve optimum efficiency and customer-centered experiences. Open Banking is quickening this move, making banking truly digital by establishing an interconnectedness that we currently see in the ecommerce industry.
With their size, analytics capabilities, capacity to appeal to huge, loyal userbases and revenue models, tech giants are strengthening their position in typical banking services at a fast clip. The competitive challenge that tech companies bring to the financial services sector presents a threat and/or an opportunity for banks to defend their market share by transforming their digital capabilities to deliver superior digital services that satisfy the demands of increasingly connected customers with growing expectations.
In a data-centric and customer-centric world, banks need to transform and work hard to retain customer loyalty and market share if they are to survive. As more technology firms move into financial services it could make the sector more dynamic and efficient, but it also introduces risks for existing players. By embracing new technology, adapting to customer’s needs and learning how the tech giants are owning the customer experience, traditional financial services firms can transform, or they face the risk of becoming extinct.
UNBANKED AND UNCONNECTED: SUPPORTING FINANCIAL INCLUSION BEYOND DIGITAL
Darren Capehorn, Director, Icon Solutions
Many of us take it for granted, but accessing basic financial services is fundamental to our economic and social development. It is hard to ‘get on’ if you are forced to hide life savings under the mattress, or rely on predatory loan sharks for credit.
Yet an estimated 1.5 billion adults around the world do not have a bank account or access to formal finance systems – making 40 percent of the global population ‘unbanked’. This limits opportunity and stifles potential. Indeed, research by EY has shown that financial inclusion could improve some countries’ GDP by up to 30 percent.
Given the transformative benefits (and yes, revenue opportunities), promoting financial inclusion has been a key priority for banks and fintechs over recent years and as a result, significant progress has been made. But with COVID-19 plunging the world into a period of unprecedented uncertainty, it is imperative that these gains are protected.
Banking on financial inclusion through technology
Undoubtedly, enabling financial inclusion has become significantly easier in the wake of technology-led innovation. Take increasing smartphone penetration, which has allowed banks, fintechs and telecom operators to offer highly accessible, low-cost digital financial services to previously underserved populations.
These initiatives have had a huge impact. Sub-Saharan Africa, for example, has become the global leader in mobile money, with competition between different providers driving rapid innovation and promoting financial inclusion at scale.
This success provides a blueprint for the power of technology. But despite the huge long-term potential, we must be realistic about the current limitations. Although mobile connectivity is increasing, over half the world’s population remains unconnected. To rely solely on digital interventions is to leave billions of people behind.
Beyond digital: Establishing community banking systems
Where there is no digital infrastructure, establishing safer financial systems is the first critical step to transitioning out of poverty. This is where organisations such as WeSeeHope, a charity committed to creating community-led change for vulnerable children in Southern and Eastern Africa, play a crucial role in laying the foundations for a sustainable future.
WeSeeHope’s Village Investors Programme (VIP), for example, has established a community banking system enabling parents and guardians of vulnerable children to access savings and loans. By providing training and tools, communities have been able to establish self-funded and self-regulated savings and loans groups, helping members to start and expand small businesses.
It may not be complicated, but this simple, sustainable and scalable approach delivers tangible benefits and supports a range of positive outcomes. Since the start of the programme, nearly 24,000 members have been trained as part of the VIP.
As a result, 67,000 children have directly benefitted from access to financial services, as their parents and guardians can afford school fees, improve their homes and invest in naturally reproducing assets to secure future income. This creates a virtuous circle, with economic prosperity driving better infrastructure to enable the delivery of more advanced financial services.
In 2018, I was fortunate enough to see these benefits first-hand in Malawi where, on average, members of VIP see their income rise from $1 to $3 a day. As you drive through this beautiful country, it is easy to spot a community where WeSeeHope has made a difference simply by counting how many homes have upgraded their traditional straw roofs with tin sheeting. Literally a shining example of improved financial prosperity!
A call for global financial inclusion
Unfortunately, we are at risk of taking a significant step back. We have all been impacted by COVID-19 in some way, but the crisis is set to extend and exacerbate extreme poverty and financial insecurity for some of the world’s most vulnerable people.
As part of a global financial community, we must consider the long-term impact and see financial inclusion as a fundamental priority as we look to re-build a fairer, more sustainable world.
Technology will undoubtedly be integral to this effort, but as the International Monetary Fund notes, “to tap the high potential of digital financial services in the post-COVID era, many factors need to fall into place.” This will take time.
We must therefore take a holistic view and ensure that organisations like WeSeeHope, which are playing a crucial and immediate role in promoting basic financial literacy and service availability, do not slip through the cracks themselves. Immediate short-term funding and long-term income projections across the entire third sector have been decimated, putting vital initiatives at risk.
These are challenging times for everyone, but we must trust that in acting now the rewards will be worth it.
TIME TO FOCUS ON YOUR ‘WEALTHBEING’
Tony Mudd, Divisional Director, Development & Technical Consultancy. St James’s Place
FIVE WAYS TO SAFEGUARD YOUR FINANCIAL FUTURE
The financial and economic impact of the coronavirus crisis has thrown up a host of issues for families to consider.
Above all, the experience has reinforced the importance of always being prepared.
The pandemic’s effect on jobs and incomes has underlined the value of having a robust financial safety net in place. And it’s never too late to take control and start planning. It’s time to focus on your ‘wealthbeing’.
Here are some positive steps you can take to safeguard your financial future.
- Income security
With almost nine million UK employees of around one million businesses1 placed on furlough since the coronavirus crisis unfolded, there is potential for large numbers of redundancies as employers examine their reopening plans and contemplate the future of their business.
If you’re in employment and still being paid, look at how long that is likely to continue. As far as you are able, try to budget appropriately. Also look longer term at other sources of finance that you would be able to access if needed (such as savings, existing investments or, perhaps, borrowing), as well as the gaps that insurance policies could help fill.
If you are facing redundancy, make sure you understand what you can expect from your employer – your notice period, redundancy entitlement and statutory redundancy cover – as well as the government support that’s available.
Ask yourself – Where do I stand? What do I need? Can I continue to pay my bills? What are my responsibilities?If you do need to dip into your savings or investments, be careful about where you take it from – and when. The right choices here will help you preserve your capital by helping you minimise your tax, reduce charges and get the best from your assets.
If you don’t have savings or investments available, check whether you’re entitled to state support. The Money Advice Service website is a good source of information and guidance. If you’re struggling, or think you might soon be, don’t hesitate to seek free, impartial debt advice from the likes of StepChange and Citizens Advice.
- Create an insurance buffer
Do a risk audit on yourself. Ask what the financial implications would be – for you and your family – if you get sick or lose your job. Ascertain what potential risks you might face as a family and as an individual. It will be different for everyone, so it’s about considering your personal circumstances and those of the people who rely on you to work out what you need. There’s nothing to stop parents or grandparents from paying income protection premiums for a younger member of the family, particularly if they are renting or starting out on the property ladder and can’t afford them.
- Prepared for later-life care?
It may seem a long way off, but the Covid-19 outbreak has shown us all that our lives can change in an instant. A will is something that should be reviewed on a regular basis, as it sets out not only who your assets will go to, but also when. Power of attorney (POA) can be especially important, and it’s essential in long-term care. This is an area where financial advice is enormously valuable. Long-term care planning is difficult, and too often people ask for advice when they are already in or approaching a crisis, when it’s likely too late to make a significant difference.
- Avoiding gaps in inheritance and legacy plans
Inheritance Tax legislation changes frequently, and because you don’t know when you are going to die, it can be difficult to cover every possible gap, even with a will in place and some form of legacy planning. The closest option is often ‘whole of life’ cover, which can pay out in trust as a legacy or help family cover any Inheritance Tax liabilities. One of the great things about protection policies is that they can be the solution to a range of different problems.
- Involve your partner and family
Many families remain reluctant to talk about money issues. Consider working with a financial advisor who can bring the family together to ensure that all the necessary issues are discussed among the people who need to be involved. An advisor can facilitate the discussions (without emotional involvement) and offer guidance.
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