Fintechs, open banking
shape financial services
Brands attempt to improve online experience
Driven by multiple pressures on their core businesses—including low interest rates, regulatory constraints, and fintech competition—banks expanded into new areas, acquiring upstart companies for their innovations and growth potential. Open banking and cloud technology added new opportunities and challenges.
Open banking—the ability to aggregate and share consumer financial data across institutions—compounded the ongoing difficulty of differentiation in certain markets. Although banks could provide consumers with comprehensive dashboards of their personal finances, the similarity of the offerings limited competitive advantage. Similarly, the use of cloud technology opened new product possibilities, but the low cost of entry attracted fintech startup competitors able to provide superior customer service in niche parts of the business.
When the fintechs attempted to widen their appeal from a narrow focus on millennials, however, they faced some of the same challenges as traditional banks. Able to build on their perceived difference, fintechs successfully built online business around payments. But they were less effective at developing the functional trust necessary for attracting the mortgages, savings accounts, and other financial products that rely on the long-term customer relationships vital to traditional banks.
These trends impacted banking amid the uncertainties of China-US trade tensions, Brexit, and a divisive political climate, which all seemed like manageable pressures after banks also contended with the unprecedented and devastating financial impact of the Corvid-19 pandemic. The BrandZ™ Global Banks Top 10 declined 19 percent in value. Regional bank brand performance varied based on local circumstances, but the BrandZ™ Regional Banks Top 10 declined 11 percent overall.
Open banking challenged banks to improve customer experience with integrated financial information to help customers reduce their taxes, revise an investment strategy, and in other ways take control over their financial health. Open banking brought traditional banks into competition with startup fintechs like Betterment, a robo advisor.
Open banking also changed the banking ecosystem, creating a space for application programming interfaces (APIs), organizations that develop the infrastructure for securely accessing consumer data from various institutions and presenting it to consumers in ways that create useful financial products and positive customer experience. JP Morgan Chase, for example, has an agreement with Plaid, an API now owned by Visa Inc.
For regulatory reasons, the fintech world was more advanced in the UK. Fintech’s like Monzo and Revolut challenged the much larger legacy banks, which relied primarily on physical branches, although they increased their digital presence. RBS launched a fintech brand called Bo in the UK, for example, while HSBC Holdings plc introduced an app, called HSBC Kinetic, aimed at young business owners.
Meanwhile, the fintech influence potentially expanded when Monzo and Revolut entered the US market. Faced with increased fintech competition, traditional banks sometimes engaged in “acquihiring,” purchasing businesses primarily to gain talent and knowledge. In other instances, traditional bank brands created innovation hubs to develop online offerings that can compete with fintech’s. Citi partnered with a software fintech called Cachematrix.
Citibank invested heavily to expand its digital footprint and convert holders of the Citi credit card into customers of Citi banking services. Citi operates a limited physical footprint of around 700 branches, concentrated in New York and a few other major cities. Other major US banks have much larger physical networks. Wells Fargo Bank and JP Morgan Chase operate the most branches in the US, over 5,000 each, followed by Bank of America with over 4,000 branches.
Indonesia’s BCA, the only bank brand that increased in value, invested in digital technology to make the user experience friendlier with mobile banking, QR codes, and e-wallets. BCA, which, ranks No. 1 in the BrandZ™ Top 50 Most Valuable Indonesian Brands, is working with fintechs to develop cashless payment.
For now, the digital investments of traditional banks enabled them to compete more effectively against each other and fintechs. Goldman Sachs introduced a revised version of its Marcus app, which uses the technology of Clarity Money, another Goldman Sachs fintech acquisition. The banks also anticipated a widening competitive set that may include more activity from technology giants. Goldman Sachs and Apple co-branded a credit card. Citibank partnered with Google on a checking account.
For technology companies, the central appeal of banking is access to consumer data. Google and Apple already offer digital wallets. Facebook planned to introduce a digital wallet called Calibra as part of its Libra cryptocurrency initiative. The possibilities are most evident in China, where people conduct daily business within the ecosystems of Alibaba’s AliPay or Tencent’s WeChat Pay, the mobile apps of technology brands, not banks.
Meanwhile, China-US trade negotiations helped accelerate the entrance of Western payment companies, including Mastercard Inc., Visa Inc, and American Express Co., into the Chinese market. And the Chinese government approved the application of PayPal Holdings Inc. to acquire a majority interest in Gopay, a Chinese online payment provider.
Covid-19 | Impact
Sharp profit decline signals trouble ahead
Covid-19 compounded challenges for banks already struggling with the low interest rate environment and fintech competition. Important revenue streams slowed overnight, including cross-border mergers and acquisitions, IPOs, and corporate borrowing. The big banks brands remained profitable, but not as profitable. In the US, JP Morgan Chase, Bank of America, Citigroup, and Wells Fargo experienced a surge in deposits as worried customers rushed to protect their finances. Public anxiety limited the number of borrowers, however. And banks anticipated consumer loan defaults. Four of the Regional Banks Top 10 are state-owned Chinese brands. While Covid-19 and the slowdown in the rate of China’s economic growth affected the nation’s banks, the impact was moderated by their strategic role in helping the nation recover from the pandemic. The Global Banks Top 10 lost 19 percent in value with every brand declining. Although two regional banks increased—Agricultural Bank of China, and Indonesia’s BCA, which rose 11 percent—the Regional Banks Top 10 dropped 11 percent.
Brand Building Action Points
- Educate consumers
Reminding people about the purpose of banking may cultivate trust and increase engagement in the category. To attract new, young customers, it is useful to educate people about how banks help individuals and organizations prosper, essentially by taking interest-bearing deposits and loaning the money to others.
- Cultivate trust
Although fintechs have been offering their online financial services for less than a decade, many have achieved a strong connection with customers based on their difference. However, people are still more likely to trust traditional banks with their money. Fintechs need to build transactional trust.
- Design the digital experience
Digital banking needs be more than a pretty interface, especially as it becomes the main way a lot of people bank. A collaborative team needs to design the digital customer experience, not just the part that the customer sees, which is critical, but everything behind the scenes that creates and operationalizes the customer-facing brand experience.
- Manage the brand portfolio
To compete with fintechs, some legacy banks are introducing new apps. Whether these apps should be branded separately or offered underneath the master brand umbrella depends on the level of trust enjoyed by the master brand. When using sub-brands is the best option, banks need a clear strategy for managing the growing brand portfolio.