Apple took only five years to become America’s largest music retailer, and seven to become the world’s largest. In eighteen short months, Google erased 85% of the Market capitalization of the top GPS companies by launching its mobile app Google Maps. Alibaba, Chinese look alike of Amazon, became a $16 billion lender in less than three years, and China’s largest seller of money market mutual funds in only seven months.
Companies seem to be venturing into new industries for growth with increasing regularity policies. In a survey by Accenture, 60 percent of executives said their company intends to make alliances, joint ventures or willing to make acquisitions over the next five years.
This represents a big challenge to the global banking industry where, in developed markets, growth and profitability are still at about half of pre-crisis levels. As banks recover from the downturn or better known as the Global Recession of 2009, non-banks are taking advantage by proceeding aggressively with digital innovations and gaining more and more of the banking value chain. Accenture in its survey also estimates that this competition between non-banks and traditional banks revenue has the potential to erode one-third of traditional banks revenue by 2020.
Payments, which are almost one-fourth of traditional banks revenue, are one of the most fought after areas. PayPal has become the number one online payment method in some countries (unfortunately not available in Pakistan), and start-ups like Square and Stripe are already earning multi-billion dollar valuations by analysts. Retailers are moving in as well and they are fast: almost one-third of local Starbucks revenues in United States are paid through their own loyalty cards. Stonage Jeans Co, Junaid Jamshed, K&N’s Gloria Jeans Coffee are examples of earning revenues via such loyalty cards in Pakistan.
T-Mobile introduced a new checking service by the use of a smartphone app and ATM card in January 2014. Google launched its plastic debit card for its Google Wallet in November 2013. Walmart has teamed up with American Express to commence a prepaid card that is functionally a debit account; it took the stage by adding more than a million customers in less than a year. In 2009, Telenor Pakistan partnered with Tameer Micro Finance Bank to introduce branchless banking for the first time in the country.
Technology giants, telecommunication companies, and retailers have to struggle against banks, if they compete to product-for-product and service-for-service, and many analysts believe that regulatory barriers will dampen disruption. New entrants already are a threat to banks by raising their service expectations levels and creating distance between the banks and their customers.
The risk for these banks is that new competitors will are dragging them to a limited role as back-office utility, while non-banks are trying to become the new face of their customers’ financial lives.
Banks cannot respond to these threats by simply becoming “more digital,”— closing down branches and rolling out better mobile applications and online banking services is not the right plan B. If they want to defend their turf against the Googles and PayPals of the world, they themselves must move further into the commercial lives of their customers. They must learn to play a greater role not just at the moment of financial transactions but before and afterwards as well.
Banks likely possess competitive advantages in the digital world. They have large customer bases; vast amounts of customer information and transaction data.
Instead of simply enabling customers to save money and pay for things, banks have the potential to combine their vast transaction data with new digital tools to help customers make better decisions on what to buy, and where and when to buy it – whether it’s dinner and a movie or a new home. Muslim Commercial Bank recently took their step by introducing MCB Lite the world’s 1st socially connected Mobile Wallet.
As the lines between industries blur all around, financial services will take on new dimensions in the minds of consumers. To be a profitable sector, banks cannot simply rely on providing accounts and access to funds. The future of the industry will depend on its ability to provide services that help customers save and better manage money in their everyday lives.