You’ve probably heard the statistic – 2.5 billion of the world’s adults don’t use formal financial services, including roughly 60% of adults in developing economies. With the challenges of reaching those markets profitably, most banks have traditionally focused their efforts elsewhere. But in Kenya, financial inclusion has grown from under 30% to over 65% in less than 10 years – due not to banks, but to M-Pesa, Safaricom’s wildly popular mobile money platform.

Kenya offers just one example of the challenges facing banks in the digital age. As online and mobile banking open markets and inspire products that were previously out of reach, banks around the world are facing a vastly changed landscape of new risks and opportunities. Here are five things they’ll need to do to succeed.

Responding to non-bank competition in mobile finance

As telcos eat banks’ lunches in Kenya and other countries, African banks have had to make a tough choice: either collaborate or compete with them to serve the lucrative mobile banking market. Their counterparts in other countries are starting to face a similar dilemma. In China, e-commerce giant Alibaba and Internet services company TenCent have popular mobile wallets, and are expanding into other banking services. And in the U.S., major banks have responded to the launch of Apple Pay by both partnering with it, and gearing up to launch mobile wallets of their own. Competition is also building on other fronts, with incursions on the banking value chain from retailers like Starbucks and Walmart. Banks’ success will increasingly depend on their ability to adapt to these changes. Some analysts have predicted that up to half of the world’s banks could fall to digital competitors in the coming years.

Competing with online lenders

Late last year, Lending Club raised close to a billion dollars in the first ever-initial public offering for an online lending platform. It was just the latest sign of the burgeoning popularity of peer-to-peer lending platforms. While standard consumer finance loans have declined in recent years, peer-to-peer lending has grown at an average pace of 84% a quarter since the second quarter of 2007, with similar growth in small business lending. Though these approaches still account for a tiny fraction of banks’ outstanding loan capital, their growth isn’t the only reason banks view them as a disruptive threat. Peer-to-peer platforms provide access to loans that is quicker and easier, leveraging online data and technology to assess risk, assign interest rates, and provide loan offers to qualified applicants in a matter of minutes. And with the process taking place entirely online, their costs are lower, allowing them to offer more competitive interest rates. With 90% of the loans being deployed through major P2P lenders, banks have largely responded to this competition by panicking, partnering with P2P lenders, or co-opting them. One way or another, successful banks will need to tackle this issue in the coming years.

Adjusting to changes in consumer sentiment and behavior

According to a 2014 survey, 71% of Millennials would rather go to the dentist than deal with their bank. What’s more, 73% would be more excited about a new offering from tech giants like Google or Apple than from their own bank, and a third believe they won’t need a bank at all in the future. With more and more customers expecting to perform core banking functions on mobile devices, these statistics are alarming. Banks around the globe are competing on tech companies’ turf to roll out digital platforms to customers who, in the aftermath of the 2008 crisis, have little trust in the financial industry. Today’s customers are also better informed and more price sensitive than before – and they’re not shy about broadcasting a bad banking experience to the world via social media. Banks will have very little room for error as they shift to online and mobile services, especially when competing against established and well-trusted non-bank alternatives.

Transition to the post-branch age

In 2014, as banks across the country transitioned to offer mobile and online services, the number of bank branches in the U.S. dropped to its lowest level since 2005. This shift will force banks to migrate many of their branch functions online and seek out new ways to create an emotional connection with their customers. This could involve shifting to minimally staffed “light branches” oriented to basic transactions and sales, video-enabled ATM kiosks that can handle routine transactions, strategically located full-service branches with iPad-wielding customer service reps, or any number of hybrid solutions linking digital tech with human service. Adapting legacy systems to these new models – without alienating more traditional customers or compromising still-needed high-touch services – will be an ongoing challenge. (Ironically, this is one instance where the developing world’s lack of a physical banking infrastructure provides an advantage.)

Stay ready for the next new thing

As Kenya’s example shows, bank competition can come from unexpected corners, and new innovations can quickly scramble the financial landscape. As the mobile revolution continues and companies experiment with potentially disruptive technologies and new business models enabled by global connectivity, banks need to avoid being blindsided by the next big thing. Some institutions are responding by launching innovation labs in financial innovation hotspots, increasing fintech investments, and forging alliances with fintech start-ups. Whatever their approach, banks will need to be agile in responding to the shifting dynamics of today’s market.

  • Luther

    If so, such expectations are likely to prove fragile because SoFi faces certain key competitive and
    balance sheet risks that will slow down its growth, creating potential for sizeable losses to investors when those risks materialize.


    March 9th, 2015 0:25

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