The enduring role of banks in a digital world
Global technology companies have changed many industries and banking has not been immune from this digital onslaught. But banks themselves have maintained their central role in a world increasingly dominated by tech companies. The key advantages banks have over technology companies include the solidity of branches, brand loyalty, and national purpose. Banks also have zero tolerance towards failure. Tech companies do many things well, and banks need to learn from them if they are to maintain their central position.
“Twenty years ago, Bill Gates said customers need banking not banks; and 20 years later here we all are,” says Paul Cobban, Chief Data and Transformation Officer at DBS in Singapore. How has this happened and why have the tech companies been unable to make a real dent in the leading role that banks play in every economy?
Generally, the largest global tech companies have chosen to operate in sectors that can be easily digitized and are generally not regulated. Banking has been digitized for decades and is heavily regulated. So, it wouldn’t be the easy win for the tech companies as it was in other sectors, such as books, music or photography. “It would be bold to say these tech companies pose no threat to banks, especially as some of them have gone into the payments arena and been successful. One example is China’s Ant Financial,” says Cobban. “Overall, regulation makes it more challenging for them to get into. Taking on banking also requires a significantly higher investment than other industries.”
This does not mean that banking is unchallenged by the tech companies. Far from it, in fact. For instance, in China you cannot order a taxi without going into WeChat and it makes little sense to use another app to complete the transaction. Therefore, WeChat can partner with whichever bank it chooses to do this at the cheapest price. “With examples like WeChat, there is a danger that banking could get aggregated and commoditized,” says Cobban. “Banks will still need to exist as they have the foundation, the capital and the regulations in place.”
At the other end of the scale, much has been said about the swarm of tiny fintech companies, which are each nibbling away at small pieces of banks’ business. Individually they are not much of a threat, but collectively they could pose a big challenge. Cobban notes that while this may have been true a few years ago, the market has changed since then. “Fintech companies were very aggressive in their ambitions, saying they were going to take the banks’ lunch. But it has since changed as they have realized that incumbent banks have customers and money, which they don’t. They have learned that their route to success is to collaborate with banks and get access to their customers.”
These twin challenges, of commoditization at the top and revenue leaking away at the bottom must be met by banks. DBS is meeting it in two ways, firstly by changing its corporate culture and secondly, by getting close to the customer and really understanding where banking fits into their lives. “No one wakes up in the morning and says, ‘Hey it is a great day to do some banking!’ There is always something bigger the customer wants to do,” says Cobban. “Understanding those broader requirements and working with partners to make it happen, is where banks will win or lose.”
Facing the cultural challenge posed by technology companies, DBS has gone to those very organizations to find out what to do. “Our original intent when we started was to learn from their technology. But we realized we were missing something - it is their attitude towards culture. We want to embrace the technology AND the culture. Their cultures are all about empowering people, treating them like adults and not overly managing them. We have started introducing this thinking into the company.”
A further advantage that banks have over technology companies is the ecosystem in which they operate. Some banks and bankers might moan about the weight of regulations they face, as well as the oversight of central banks. But these twin pillars of the banking ecosystem are in fact huge systemic advantages for the individual banks, and DBS recognizes this.
“We are lucky here in Singapore to have a very progressive regulator. A central bank and regulator’s mission is to provide economic stability and growth across a nation. By nature, they are very conservative and that’s how it should be. They try to balance increasing competition while maintaining stability.”
The wave of new regulations that have come about since the global financial crisis (GFC) has come at the same time as the growth in the number of fintech companies. While the two trends are correlated, Cobban does not believe that they are causal. Since the GFC, there has been a rise in the mistrust of banks and banking. This is something that some fintechs looked to tap into early in their lives, before they realized that banks were not going away, and remained the place where both the customers and money reside.
But for that to stay the same, banks need to change. As well as being more customer centric and having a culture of ownership, they also need to be able to act quickly in the face of emerging disruptions. DBS has been able to meet the challenges posed by the digital revolution. “The biggest single competitive advantage we have is eight years of building the foundations, which enables us to have the skills and culture to act nimbly and adjust,” says Cobban. “There is so much emerging technology and it is difficult to know which ones will work. You must run experiments and very quickly figure out where you are going.”