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Three Sectors Lost By Banks

There were the times when banks had almost everything. They offered deposits, loans, cards, money transfers, currency exchange, insurances and so on. And the most compelling thing was that they had almost no or little competition.

Unfortunately for banks, these times are over. New players on the market found their niches to challenge the big ones. They started to offer easy payments, especially trans-border ones, currency exchange with better rates, new services based on the access to user bank accounts through APIs, and even consumer loans for those, who can’t get a credit in a bank, or those, who want to make some profits on lending (peer-to-peer loans).

Pay Your Pals

One of the first examples of the new era in banking was PayPal and its easy and fast system of payments for the Internet community. Instead of traditional approach, where a merchant used to use its card imprinter/reader and verified card data talking on the phone with a customer, or simply asked for a money order, PayPal offered simple, yet revolutionary solution: a middleman service where every user can be both the payee and the recipient. What made the whole idea brilliant was the way of recognizing recipients: not by account numbers or names, but by email addresses.

PayPal was a part of eBay, so its primary goal was to serve the users of the Internet bidding behemoth. Paying via registered, unique email address seemed to be the most intuitive way for individuals. Institutional merchants, such as shops or vendors, could either use their email addresses or APIs, which would work directly from their websites (“Pay with PayPal” buttons).

Soon PayPal took the majority share of Internet payments, and its copycats and lookalikes started to serve other regions and niches, mostly as payment gateways for all merchants willing to accept credit cards or express money transfers without the need of installing costly infrastructure. These middleman companies were in fact the aggregators of all available payment options with a simple API to send all necessary information from the merchant’s webstore to the payment provider. It was not only a more comprehensive offer for e-commerce, but also easier to implement and much cheaper than the standard bank solutions.

Payment processors allow customers to pay for online goods almost anywhere in the world and without high costs of typical international money transfers. Some of them, PayPal included, offer even further savings by using their own, better currency exchange rates and commissions than when paying offline, on-site.

The Online Current Of Currencies

Since we are here with currency exchange, it’s good to mention online solutions, which beat banks by every measure. For example, in Poland there are many customers with loans denominated in EUR or CHF. Such loans were supposed to be cheaper than denominated in local currency, but the rise of exchange rates after 2008 dramatically changed this landscape. What’s worse, banks secured their profits by accepting the installments in local currency only, just to exchange them using bank’s much worse rates. Fortunately for customers, a law bill was passed allowing to pay the installments in the currency a loan was denominated in.

Clients rushed to independent exchange offices, and soon there were many online solutions for an effortless, smooth currency exchange with better rates, free money transfers between user’s bank accounts and even debit cards associated with foreign currency accounts. Banks were punished for their greed and lack of agility when facing a new competition.

Speaking of loans: with online platforms for social (peer-to-peer) lending or quick loans, banks lost some of their market share in credits. When you want to save some money and make some profits on this, you can go to a bank and put a deposit there. The bank will then lend your money to somebody and take its cut. Wouldn’t it be more profitable to skip the bank and lend the money directly to the people in need? This is exactly what peer-to-peer lending does, contacting those, who want to invest with the ones, who want to borrow some funds.

Certainly, it’s more risky than a bank deposit, but both sides benefit from better numbers: higher profits for the lender and lower costs for the borrower.

Quick loans, on the other hand, are not meant to be cheap, but to be very quick. Online services, which are not restricted with bank loan regulations, focus on delivering as much money as possible within couple clicks and minutes. They have streamlined, graphical interfaces easy to understand and operate, and their KYC procedure is reduced to the absolute minimum. Banks simply can’t compete here, because their target consumer is different—credible and trusted—and because they’re bound with regulations and procedures.

API or Another Place of Innovation

And last but not least: APIs. Small, yet powerful pieces of code, which enable a whole new world of possibilities by accessing information from different sources. Thanks to APIs, it’s possible to build products or services using data stored elsewhere. Personal finance managers, payment processors, currency exchange services and more can be based on existing databases of banks, financial institutions, government agencies, or even social media.

APIs allowed small third parties to create innovative solutions and disrupt the financial world. Banks weren’t able to keep pace with these agile new players, but found the other way: they buy either specific products for implementation in their systems or acquire the companies that create API-based solutions.

The aforementioned examples of sectors lost by banks prove that the old-fashioned financial institutions are too big, too corporate or too slow to innovate and compete with smaller, but passionate creators empowered with new technologies. The question is, will banks start to change the market before the market changes them?

 

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Konstantin Rabin

Konstantin Rabin

Head of Marketing

Kontomatik

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18 Aug 2015

Location

Warsaw

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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.


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