Banks are entities with several disparate services. This has been for legacy reasons as people trusted banks for all money related business (except may be insurance). thus banks offer payments, deposits, loans, wealth and asset management, broking, custodial , transaction advisory, investment banking and other varied set of services. This variety could have also been necessary when economies of scale are not achievable in one single line of business. This is no longer necessary in the current scenario when economies of scale can be achieved through technology. Thus there is a scope for breaking the bank into several smaller entities serving specific need of the customer. This is what is exactly happening right now in the fintech world. And this is how the bank is getting unbundled:
- Digital wallets and gateways are replacing payment solutions
- Online liquid funds are replacing deposits (especially in China. Not yet happening in India)
- P2P lending and automated lending are replacing traditional bank loans
- Robo-advisors are taking over traditional wealth management
- Penny brokers are replacing broking services. this revolution has to still disrupt OTC broking though
- Several crowd sourcing platforms are replacing investment banking at least for smaller firms
Some areas where fintech has still not made a significant mark is:
- Smart beta investment products at very low cost
- Custodial and security services are still primarily handled by banks as lot of trust is involved
- International payments because of regulatory issues
The only way for a bank to beat the onset of fintech revolution is to be part of it. This involves several things:
- Upgrading technology to latest stacks with more open architecture and leveraging services of other tech players
- Digitising the offerings
- Using data analytics for increasing customer LTV and reducing inefficiencies
