«The rapid digitalisation of the economy and society is presenting banks with a variety of challenges: Alongside defending their core areas including interest rate differential business, they must also develop user-friendly solutions for new topics relating to payment, special types of credit and sustainable and/or digital investments.»
Text: Marco Zollinger , Images: Swisscom, Unsplash
16. March 2022
Delivery services, cashless businesses, boom in e-commerce, medical information via app and business meetings via zoom – the Covid-19 pandemic has significantly accelerated the pace of digitalisation across many areas of the economy and society. Conversely, in the broader financial services sector the impact is most visible in mobile payment processes: Twint continues to gain new customers. Conversely, a look at other areas of digital banking shows an inconsistent and, in part, surprising development:
Neobanks: the framework conditions are actually very favourable for these banks, particularly as direct in-person contact has been largely restricted at certain times throughout the past two years. However, the anticipated boom has yet to materialise and even large banks are taking the time to overhaul their mobile services. There are a number of reasons for the tentative growth in neobanking: so far neobanking has simply comprised a collection of conventional services made mobile; integration into digital ecosystems has been insufficient. The breadth and depth of features fall short of those offered by existing e-banking. The price structures alone are enough to deter people from switching. And a very important function, payments, has been outsourced to the joint venture Twint. Consequently, very few users have switched their primary banking relationship to a neobank.
For ambitious financial service providers, this is the ideal environment for launching their own mobile bank, even if they are not the first to do so. We expect some more developments on this front over the next two years.
Cryptofinance: something which three, four years ago many banks had categorically ruled out is threatening to enter the world of Swiss banking via an unexpected route. It isn't the many retail customers with initial experience of using Bitcoin, etc. via digital wallets who have set the industry in motion, it is the wealthy private banking clients. Private banks, who were active early on in this area, have reported high margins and are likewise enjoying a considerable influx of new customer assets – and with that they have forced the hand of all the other players in this sector. In the meantime, distinct trends have begun to appear: following on from the success of the first cryptocurrencies, such as Bitcoin and Ether, in 2021 we saw the breakthrough of non-fungible tokens (NFTs), through which art and many other media have been digitalised and turned into commodities. This topic is also relevant to private banking.
Parallel to this, blockchain technology – the foundation of cryptocurrencies – has become increasingly important. Central banks are preparing for the introduction of monetary systems based on blockchain and, in certain areas, are set to replace paper money in the coming years. The most recent example of this is China, which has introduced the digital Yuan in connection with the upcoming Winter Olympics in Beijing and wants to establish this as a digital payment method at the games.
The development is so far along now that even a Bitcoin crash would not halt these new projects. The problem with cryptocurrencies from the perspective of traditional banking is on a different level: proponents are over-invested and sceptics under-invested. Both sides would benefit from a more balanced portfolio, which would offer them better diversification of risks and allow the full potential of cryptocurrencies to develop.
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Sustainability: over the past few years, the topic has become significantly more pressing. As an area with a comparatively low consumption of primary energy, the financial sector is the key to reorganising the economy in line with net zero goals by 2050. This transition will require a lot of money – money which will come largely from institutional and private investors.
The topic of sustainability is inextricably linked with innovation and digitalisation: this is because the broad definition of sustainability encompasses transparency in the use of invested funds, fees and in environmental performance. This transparency can only be efficiently achieved using digital means – this in turn makes sustainability a relevant factor in banking technology and digitalisation.
This shows that it is in no way sufficient for banks to provide a few sustainable funds and ETFs to customers who explicitly request them. "Green" loans for making buildings energy efficient, and converting conventional vehicle fleets to electric are examples of areas where banks can demonstrate and live up to their responsibility with regard to sustainability. As energy consumers they can also lead by example through the use of renewable sources to cover their energy needs.
BNPL: the abbreviation stands for "buy now, pay later" and upon closer inspection, is the digital reinvention of payment in instalments. At first glance, this special type of short-term loan is in competition with credit-card business.
To date, such loans have been a niche business in Switzerland. However, recent surveys show the proliferation of non-mortgage financing in Switzerland: according to a Moneyland survey from October 2021, 56% of respondents are happy to purchase home electronics, cars and furniture using credit.
BNPL poses a challenge to banks for various reasons: this innovation has been driven by the payment sector – the primary reason behind its usage is the user-friendly integration into the payment process. Banks are not only losing a potential source of attractive interest rate differentials here, but also the direct customer relationship, if Klarna and similar companies expand their positions here. BNPL is an important aspect of the digital ecosystem, which is challenging banks. This is the solution for banks that want to be part of BNPL: the complexity requires cross-sectoral cooperation. This is likewise the key to success for many issues surrounding digitalisation.