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Banking is being disrupted, but don’t count out the big players yet

By John Oates

In a world of secure mobile communication the role of banks is being disrupted. The need for branches and paper-based transactions is fading with a variety of easier, quicker communication methods.

But banks still have several advantages.

Firstly they have long experience in embracing technology. They rely on artificial intelligence systems for investing and have long exploited customer data to create new services and products and decide who to market them to.

Banks were among the first adopters for almost every type of new technology from high performance computing to character recognition systems which automatically scan cheques.

They maintain complex customer relationship systems to monitor and update credit ratings and other aspects of customer profiles.

Secondly the banks exist in a highly regulated world which works as a barrier to competitors. Rival companies must prove their probity, funding and the security of their systems to various regulators before they can take anyone’s money.

There has been some relaxation of these rules and governance to let in new players like Apple and PayPal but it is still a tough market to enter.

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The big changes which are happening do not necessarily exclude the banks.

The growth of peer-to-peer payments is real, but many of the largest players are backed, and branded, by the big banks.

Technology is providing both disintermediation and creating a new market for providers of corporate credit at the expense of traditional providers.

Banks still own the customer interface and still, despite their best efforts, the consumers’ trust. There has been a slight increase in people switching accounts – just over a million did in 2016, but they mostly choose another bank rather than a start-up.

The most truly disruptive technology challenge for the banks is Bitcoin and the various blockchain related currencies.

Even though these currencies quite explicitly exclude banks, and most banks are forbidden from exchanging Bitcoins into cash, the technology which underlies the crypto currencies could still provide an opportunity for established financial companies.

Blockchain’s ledger technology can massively reduce back office costs for banks and lenders – as several government projects have already shown.

One tempting target for ledger-based start-ups is in international transfers and currency exchange where banks still enjoy huge margins.

This will be a slow process and carried out in step with the regulators – another area where banks have long experience and expertise.

The relationship between credit card companies and the banks is also under threat. There are several new players in this area offering online and mobile transfers for far lower fees and far faster completion times than the banks.

Banks still have a massive trove of underexploited customer data. Almost every business and consumer interaction still leaves a trail in banks’ back office system. Making sense of that treasure trove of corporate and consumer data is not easy but it leaves the banks in a prime position to move their business as quickly as technology and their customers demand.

By deeply mining the big data they already have, and watching for changing business and consumer trends, the banks can stay ahead of any competition.

Banks are also following other enterprises in changing the structure and strategy of their technology teams to better challenge competitors.

That means creating smaller, flatter reactive teams which follow best management practise and use agile software development techniques to create new products and services as well as code.

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