History is full of evidence that adapting to technological change is a prerequisite for standing the test of time. Yet history is easily forgotten or analysed without sufficient perspective. Traditional companies in an industry often lose sight of what is happening around them, and by the time they truly grasp what is going on in their environment, it is too late to react. This is not the case in the banking sector, rest assured.
There are three main reasons why a company or an industry can be swept away by a context of technological disruption in its sector.
The first is a lack of vision about what is happening (denying reality). A classic example is Nokia, which relied too heavily on its past success and brand strength, underestimated the importance and speed of technological change (smartphones), and went from being a leader in the mobile phone sector to having barely a 3% global market share within a decade.
The second is a lack of capacity to adapt and compete in the new environment. The changes that innovation requires are costly and not always easy to identify. Investment is needed in research, technology and teams, and in attracting and developing the necessary talent… all to prepare for a completely uncertain scenario that is difficult to assess using the metrics companies are used to.
Third, companies are sometimes constrained by a regulatory framework that is too rigid and demanding to allow them to evolve at the speed and in the way that current changes require.
In today’s context, the banking sector faces the emergence of countless high-potential technologies (blockchain, big data, artificial intelligence, cloud computing) and notable changes in society regarding digital behaviour. Ours could, in fact, be one of the sectors in which this process brings the greatest changes in terms of the business model. How is the sector responding to these changes? How is it addressing the three aspects mentioned that could threaten its future business?
First, banks have a realistic view of technological developments and their implications, and they are not standing still. There is a clear awareness in the sector that the current technological climate is ushering in a period of significant change and new business opportunities to embrace. Banking has a strong technological component from the outset and is already accustomed to innovating, although this does not mean the sector is not facing a major challenge. It is difficult today to find a bank that denies the phenomenon and is not engaged in some form of internal transformation towards digitalisation. To a greater or lesser extent, almost all institutions are innovating and evolving their business model, aware of social and technological change. The industry, therefore, is not lacking in vision regarding the change ahead.
How capable is the banking sector of adapting to the new environment? Without underestimating the challenge, it must be said that the phenomenon tends to be exaggerated as a threat and the industry’s real capacity to respond—and the opportunity the moment offers—tends to be undervalued. It is often interpreted that one of the main threats lies in the growing appetite of new entrants for financial activity. On the one hand, new digital-native start-ups benefit from business models that make them agile in identifying customer needs and designing responses to meet them. On the other, major American and Asian tech companies are already entering some segments of the financial business, such as payments or lending. Do these competitors have the capacity, as some predict, to swallow up banks’ business? Let us analyse it.
On the one hand, we believe the current context lends itself more to the creation of an innovation ecosystem than to a competitive battlefield. Banks, innovative start-ups and major tech companies make up—and have the opportunity to deepen—a collaborative ecosystem with scope for countless partnerships whose outcome, possibly, companies cannot achieve individually. An ecosystem, moreover, in which almost everyone wins, starting with customers; those who do not join the innovation dynamic are likely to lose.
On the other hand, and without this being a self-congratulatory argument, it is worth bearing in mind two strengths of the banking sector that are key to the business: trust and security in handling financial data. Money is not just any commodity. Needless to say, it is not the most important thing for individuals, but it is very important; it does not buy happiness, but it helps people be happy and meet their needs. Money is, in fact, one of individuals’ main concerns and, therefore, they are extremely demanding of those who manage their finances and savings; trust in the management of money is not granted so easily.
This also means that, by extension, financial data is not just any data: it is, in fact, a type of data that is highly monetisable, meaning a great deal of value can be extracted from it. This contrasts with the business of major tech companies, generally based on high-frequency, high-volume data compared with banking data, but of lower relative value (less monetisable). Hence the interest the financial world arouses in this sector.
Bank customers have traditionally placed their trust in banks to manage their finances and financial data. Even despite the reputational damage the banking sector has suffered over the past decade, when customers are asked whether they trust their bank, a large majority answer yes. This is the result of the special attention the banking industry pays to security (and cybersecurity) and data protection, both essentially aimed at protecting the finances of individuals and companies.
Customer trust in banking, however, is not so easily transferable. Major tech companies have many positive aspects from which the banking industry can learn, but when it comes to ensuring the security and confidentiality of data processing, they are not necessarily an example, and this can significantly undermine their ability to enter this sector.
Are these strengths in security and data management, and others, sufficient to face the future? No—there is no room for complacency in this context. Banks must digitalise their operations and be aware of the possibilities that mobile channels offer their business. It is not so much a matter of efficiency, where there are also gains, but of a change in business strategy, customer relationships, internal culture and structure, modernising internal infrastructures—and all of this requires incorporating or developing human capabilities geared towards new technologies and strategies.
Finally, let us address the role of banking regulation: does it work for or against the transformation of the banking sector? The regulation that characterises the sector is essentially justified by reasons of financial stability and consumer protection—objectives that must prevail regardless of who carries out the specific financial activity. At present, the entry of new players into the financial landscape is creating an asymmetry in the financial regulatory context that largely stems from the fact that many new entrants carry out financial activities that do not require a banking licence, so the regulation that applies to them is limited to that attributed to those activities, if any. In the case of banks, the prudential regulation derived from holding a banking licence is very demanding (capital, liquidity, leverage requirements, etc.) and applies as an umbrella to all their activity. In short, the same activity, depending on whether it is carried out by a bank or not, is subject to different regulatory requirements. Therefore, the principle that the same activity should be subject to the same regulation regardless of who performs it is not being met. This asymmetry, in addition to penalising banking from a competitive standpoint, puts at risk the consistency with which financial stability and consumer protection are safeguarded.
In conclusion, the banking sector is aware of and enthusiastic about the technological revolution we are experiencing at the moment, and it has the capacity to adapt and compete in the new context. The remaining challenge is for regulation and financial supervision to adapt to this new environment, to preserve conditions of financial stability, security and consumer protection, and to ensure an appropriate competitive framework.
Rocío Sánchez Barrios, Director of Public Policy at the Spanish Banking Association.
