Embrace the internet to determine the future of banking
The impact of the internet on the banking industry may yet turn out to be far more important than the financial crisis and the subsequent regulatory overhaul. Viewing statements on-line and making payments electronically is just the very beginning of the revolution, writes Giles Keating, head of research for Private Banking & Wealth Management, Credit Suisse (right).
Peer-to-peer lending between individuals is growing rapidly but still small relative to mainstream banking. It has enormous potential and may truly come into its own once it is linked to social networking, allowing small lenders to assess the credit of borrowers via testimonials from people they are linked to. Corporate peer-to-peer lending is another major development area, allowing the disintermediation of banks, long-familiar in the corporate bond markets, to extend to the short-term deposits and overdrafts that currently still pass through bank balance sheets.
Equally, low-cost execution-only on-line brokerages have started to extend the services offered, including tools not only for high-frequency traders but increasingly also portfolio analytics for medium and long term investors. These are likely to appeal to an increasing number of investors who either had no proper portfolio framework, or who paid substantial commissions or fees to wealth management advisers, inside or outside the banks.
And the explosion of mobile-based banking in Kenya and beyond has demonstrated that traditional means of payment and operating bank accounts can be replaced with something that is quicker, radically cheaper and simpler.
In short, all areas of banking, from deposit-taking, to lending, corporate finance, wealth management and payments systems, are set to be changed out of recognition by internet and mobile technology. Much of the innovation so far has come from telecoms companies, from internet start-ups, and non-bank brokerages.
The banks themselves have so far been slow to react, partly because of their focus on the financial crisis and the new capital and regulatory environment, and partly because the whole history of the internet -and indeed of all innovation – is that incumbents tend to be slow. But the banks still have many advantages, including the vast amount of data on their clients which could be tapped using Big Data techniques in a way already familiar in other industries such as retailing. And the banks’ relationships with regulators, difficult as they have been in recent years, may yet be helpful as their familiarity with the new rules gives them an advantage over new entrants from outside the banking industry. Overall, no-one can be sure whether it is the banks or the outsiders who will really make the running in innovation over the next few years, but what does seem clear is that embracing the internet will be crucial in determining the future of banking.
Giles Keating spoke on this topic at The Good Bank, an on-line project run by the Economist Intelligence Unit, to examine how banking can better serve the needs of society. To watch him and his fellow panellists, visit http://event.wavecastpro.com/thegoodbanklive/programme/.