Although traditional players are still by far the dominant powers in the banking industry today, new entrants such as Orange Bank, Apple Pay, Samsung Pay, etc. are working to gain a foothold in this sector now undergoing a radical transformation. A new report from IDATE DigiWorld delivers a detailed exploration of this topic, based on an international benchmark of telcos who are moving into the banking business.
Q: There is more and more talk about digital industry players disrupting the banking business. But how true is that really today?
A: The banking sector is undergoing a radical shift, due to three major changes. The first is a change in banking laws: we are seeing a legal framework emerge in every country that supports the advent of new competitors. In Europe, for instance, the entry into force of DSP2 (Payment Services Directive 2) in January 2018 aims to stimulate competition across Europe by enabling non-traditional players to enter the banking sector, such as FinTech (Financial + Tech) companies which are finance industry players that use technology to improve financial operations. The second major change is technological progress. Whether artificial intelligence or blockchain, the financial industry is helping to spearhead these new technologies, which includes a telco such as Orange offering a virtual bank advisor through its Orange Bank app, or Kodak introducing KodakCoin! The third major change lies in business models that leverage existing user bases. So we are seeing heavyweights either positioning themselves in the banking market, Alibaba being the prime example, or contemplating it, as Amazon is now doing: their massive customer base is a major asset here, and banking services are becoming part of their value chain.
Changes in the banking market
Source: IDATE DigiWorld
To summarise, then:
- Regulation is no longer an obstacle for new entrants;
- Banking is a matter of user experience;
- Banking is becoming an over-the-top service for digital industry players.
Q: Who are the market’s newcomers, and who has the lead?
A: Banks are still the market leaders, of course. But we are seeing digital industry players gain traction in the mobile payment and mobile banking markets, including Orange Bank, Apple Pay, Samsung Pay and Amazon Pay. Telcos, OS providers, equipment suppliers and OTT companies are each bringing their own background and different ambitions, but all have the same goal: to sustain a direct relationship with customers, and gain control of the entire value chain.
Q: What are these new entrants’ strategies? And what obstacles might they encounter?
A: For telcos, mobile banking is a relatively common diversification path since the two industries have common assets, and complementary aspects that can be exploited through partnerships, which is something we explore in our report.
A: In Africa, initiatives launched by Vodafone (M-Pesa), MTN (Mobile Money) and Orange (Orange Money) have proven profitable, generating direct revenue (transaction fees and value-added services such as loans and insurance) and indirect revenue, which are by no means anecdotal (customer acquisition, reduced churn and brand awareness).
In Europe, however, where the banking industry is much more mature, telcos are struggling to find a viable business model. So profitable mobile banking models may lie with FinTech initiatives built around niche services (like the one marketed by Revolut) or a low-cost strategy (Orange Bank drew inspiration from N26) to rapidly secure a large user base.
Q: Are users willing to use telcos’ banking services?
A: The biggest challenge for anyone entering this market is gaining customers’ trust. New entrants also need to be able to satisfy new demands in terms of the user experience, which has become key to creating value, and so to take a more user-centric approach. They also need to offer niche services that banks do not yet provide.
Q: What is the outlook in terms of revenue for the coming years?
A: The number of mobile banking users is forecast to climb from 0.8 billion in 2014 to 1.8 billion in 2019. As for the m-payment market, we expect to see it grow by 33.4% a year from 2016 to 2022, and to reach 3.4 billion USD, according to Mobile Payments World.
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