With the proliferation of fintech companies and innovation in the financial services industry, EY’s Niall Corrigan says there is a wave of digital disruption on the horizon. The first ripples are already being felt in some of the larger retail banking markets, he says.
How will Irish financial institutions cope with the impact when this digital wave truly hits – and will it cause slow erosion of the existing retail banks’ market share, or will they be washed away entirely by a financial services tsunami? With multiple possible scenarios, the question traditional Irish banks should be asking is – how can I prepare my organisation?
What does this wave look like?
It is worth understanding the distinct types of digital disruptors that are materialising in the retail banking sector and the value proposition they are offering.
These significantly differ from the proposition posed by traditional retail banks, who have struggled to provide a true digital experience due to a combination of legacy IT systems and a lack of capability to transform.
There has been some categorisation of these “new” banking entrants; challenger banks, digital banks, near-banks and neo-banks. In order to drill into the possible scenarios we might see in the near future, let’s define and categorise the banking disruptors:
These banks have their own full banking infrastructure and are not burdened by legacy systems. They generally have a very strong digital multi-channel offering but also have a physical branch network. These ‘Challenger Banks’ are much more agile than traditional banks as their technical stack is almost always a green-field build. One of the poster boys of the challenger banks is mBank in Poland.
The ‘s’ in ‘sBanks’ stands for subsidiary. These banks are subsidiaries of existing banks and have been created as a more digital-centric fighter brand. Examples include HelloBank! from BNP Paribas, Tangerine from Scotiabank and Simple which is owned by BBVA Group. These sBanks have varying distribution models; some having their own branch networks, others utilising their parents’ branches and in some cases, being digital with no branches.
eBanks & iBanks
eBanks such as Tandem Bank are independent digital only banks that have a full banking infrastructure but no branches. iBanks are very similar to eBanks but offer a mobile only (nativeapp) proposition. Making this distinction may seem a little pedantic but the rise of mobile only banks such as Monzo and Starling Bank warrant a distinction in this category. Starling Bank is one to watch from an Irish perspective following their recent announcement that they have been approved by the Bank of England to operate in Ireland under the EU’s passporting arrangement.
These digital only banks do not have a banking infrastructure and are not actually banks in the regulatory definition. They are backed by traditional financial institutions and can be likened to a Mobile Virtual Network Operator (MVNO). They rely on chartered banks to work in the background to take care of the money, while the neo-Bank provides a simple, customer-centric experience with the appearance of personalisation. N26 (formerly Number26) operating across Europe including Ireland is one of front-runners in this category. Collaboration in the Neo-Bank space, such as N26 & Transferwise, is an agile strategy to increase scale and diversifying the customer offering rapidly.
GAFA stands for the big four all-American tech giants – Google, Apple, Facebook and Amazon. To further monetize the data they have, these giants could decide to move into new verticals and sell financial services products. All are involved in some form of payments or financing already. This could be the biggest threat to the global banking industry as a whole.
With all these disruptors on the horizon, offering diverse propositions, the digital wave of disruption that will inevitably hit our shores might come in various shapes and sizes leading to different impacts. When one considers regulatory change such as PSD2, customer trust in Irish legacy banks at 21%, 2nd lowest across 32 countries and fintech adoption set to double to 52% there is a perfect storm brewing.
This article was first published in Finance Dublin in August 2017.