Banking on technology

You probably have an everyday account and a savings account (invented in the 1300s) and a network debit card (1978) which also doubles as an EFTPOS debit card (1984).

You may also have a credit card (invented in the 1950s), or use in-store finance (1970s). If you purchase online you may use a digital wallet such as PayPal (1998).

You pay your bills using BPAY (1997) or direct debit (1970s) and when you have to transfer funds, you use ‘pay anyone’ (1970s). Your cards probably have a PIN (1967), a mag stripe (1972), a chip (1986) and can be used for contactless transactions (1997).

ATMs still offer cash, as they have done since 1967, and interaction with your account and servicing is handled via online banking (mid 1990s) or, more recently, mobile banking (2010).

While these core consumer and business products remain virtually unchanged, the financial services sector is undergoing a major technological transformation driven by innovations in distribution, service, data analysis and new platforms.

For example, it was a very different experience getting a credit card 20 years ago. You’d start by sending a paper application to your bank. This would be followed by a long and arduous approval process, usually including a couple of trips to a branch. Your card would eventually arrive in the mail and require activation via another visit to a branch.

While the core product has barely changed, technology and automation have transformed the process: compressing the cycle time from weeks to minutes, reducing customer friction and eliminating a significant amount of operational costs.

Customers now browse for a credit card online, often via a third-party comparison site and apply online. Automated models often use external behavioural, identification and social data to make a final risk decision in real-time and if approved, a new card can be deployed ready-for-use into a mobile wallet (such as ApplePay) almost immediately.

This whole process takes place without any human intervention and the consumer’s transaction history, account balance and customer servicing are a few clicks away, 24/7.

One issue facing banks and other traditional financial institutions is that their size, culture and regulatory environment stifles innovation. As a result, agile new-entrant financial technology (FinTech) businesses are intermediating the coveted first-party relationship between banks and their customers through superior customer experience and differentiated services, often on top of existing core products.

This process is slowly relegating banks to commoditised offerings and price‑based competition, as evidenced in mortgages, savings and credit products.

Alternative payment methods such as AfterPay (founded 2015), Klarna (2007) and Affirm (2014) are squeezing themselves between banks and customers, capturing sizeable transaction fees. Their seamless, low‑friction, mobile customer experience, sophisticated data modelling and use of AI are far ahead of traditional credit providers, relegating the bank to merely a funding source.

Technology and the future of financial services

The breadth and depth of data available to FinTechs is helping customers make better decisions and manage their finances. With consent, a third-party can scrape their customer’s entire multi-bank transaction history. Apps such as Pocketbook present this information to consumers in a rich, easy-to understand format, with actionable insights, such as notifying users how much they can safely spend and when bills are due.

Analysis of a customer’s transaction history is leading to better credit decisions (something that benefits lenders and society as a whole) and easier swapping of accounts between financial institutions. The Australian Open Banking regime will take this a step further, mandating banks to supply customer data via APIs to third parties when requested.

New platforms open up opportunities to circumvent existing rails. Blockchain – which offers an open, distributed ledger that records transactions between parties – gives an insight into what is possible. Cryptocurrencies, such as Bitcoin and Etherium, which run on Blockchain, remove the need for a central bank altogether.

In Australia, the New Payments Platform (NPP), promising near realtime interbank settlement, launched this year and is slowly being rolled out. National platform projects like NPP and the UK’s Faster Payments (2008) require extensive coordination, cost billions of dollars, and take years to implement.

Internationally, disruptors like Venmo and Square are building their own systems by front-ending banking platforms with real-time peer-to-peer payments on mobile devices. Venmo is estimated to have 10 million monthly active users in the US.

Australia has joined other developed countries in supporting new entrants, as recent waves of Federal Government reforms such as Open Banking, Comprehensive Credit Reporting and new APRA rules encourage startup banks. Whether this will be successful remains to be seen.

Incumbent financial institutions won’t stand still while they’re disrupted, but they are weighed down by deep-rooted cultural issues and, post-Banking Royal Commission, increased regulatory oversight and consumer distrust.

However, under shareholder pressure, there are a range of strategic countermeasures they can deploy – some legitimate, some questionable. Forward-thinking financial service businesses have made strategic, minority FinTech investments in recent years and incumbents still own and control access to the main financial services infrastructure.

So, when the economic cycle inevitably turns, distressed or capital‑constrained FinTechs could become acquisition targets for large businesses who can ride out the downturn. Everything has a price and banks have deep pockets. Capitalism may be their solution to disruption.

Written by Andy Mitchell (MCom '13), Chief Growth and Innovation Officer, ZipCo