Why does the average person need a bank?
Banks fulfil a variety of needs: depositing money to keep it safe and having access to it; investing it; transferring money to someone – to purchase goods or services, pay bills or to fulfil a commitment; borrowing money to buy something. This is what 99% of people use a bank for. Until 10 years ago, banks had a ‘monopoly’ on all of the above.
Today, I am not so sure.
Traditional banking’s market penetration isn’t even
Banks’ market penetration, despite of being around for centuries, is smaller than one that has only been around a couple of decades - the mobile phone/telecom industry. The speed and depth of mobile phone penetration has been amazing. Today we have over 5.2 billion mobile phone owners across the World, and what makes it particularly impressive is the fact that there is a very even penetration when comparing developed and developing countries.
When we look at the penetration of bank personal accounts, according to the World Bank, it is a maximum of 89% in developed countries and no more than 45% in developing countries (Source: Measuring Financial Inclusion and the Fintech Revolution, World Bank Group Global Findex Database 2017).
Innovation is driven from outside banks
Telecoms companies are delivering innovative financial solutions, leveraging mobile devices that enable countries in Africa, Latin America and Asia to bring financially inclusive solutions to individuals who have never had access to traditional banks’ services. That, combined with the use of local merchants as agents, is a clear threat to traditional banking in these countries, that is currently based on costly branches, tellers, and ATMs.
On top of that there is a growing behavioural change across the globe where individuals are using the mobile device to perform the day to day so called ‘banking activities’ (for example, money transfer, payments, small loans, basic investments). In developing countries, we are seeing mobile/wallet banking penetration and usage growing every month, with Internet Banking usage slowing and the number of transactions in branches, apart from at ATMs, decreasing.
Consumers are driving the change
Increasingly, individuals are exchanging ‘credits’ between their mobile phones. If we make a parallel with cryptocurrencies (and how they work) and accept that ‘airtime call credits’ is a representation of value that can be exchanged for fiat currency, ultimately, we do not even need a formal bank settlement system, it is just a matter of telecoms companies’ ‘credit’ reconciliation.
Nothing stops merchants and individuals exchanging merchandise in a local market based on airtime ‘credits’, that can, ultimately, be converted fiat currency.
The model is self-sustaining, and can cover investments, as you can invest in airtime, as the price of airtime increases mirroring general price-inflation, and then exchange your ‘credits’ for fiat currency at a later date. Borrowing already exists in developing countries using airtime financing (with very aggressive interest rates and fees) representing a discount in the original price.
A new banking environment
What I am saying is that, ever so quietly, a new banking environment has been created. And behind it, customer behaviour is rapidly changing and has important consequences for the decision process of the businesses affected. However, there is still an important share of the global market that do not change behaviour as fast – the elderly population, who hold a substantial percentage of the wealth in any country – and it is therefore vital for the current system to continue to flow.
Changing customer behaviour will reinvent the retail banking model
So, the challenge for banks is to adjust, reinvent the retail banking model, not only based on technology-driven changes, but based on how their customers are changing as a result of it, how they are adapting and how far each segment of customers are willing to change and the importance of such segments to their business.
So, what are traditional banks doing about it?