When interest rates have been falling since the financial crises, banks have tried to recover their revenue streams by upselling additional services to the customers. It seems most banks have succeeded and revenues have been either growing or staying steady.  Now as FED raises interest rates and other central banks are about to follow, the future seems promising for banks.

Despite the promising raise of interest rates and success in selling wealth management, additional insurance and related services, I see also an option for alternative future. In the alternative future scenario, the banks’ margins will suffer and additional services are fleeing elsewhere as the consumers become more aware of the alternatives and competition starts cornering banks’ businesses.

Fintech companies – these new rivals

There are many ways the changing world enables more fierce competition in financial sector. It’s not probable that new major banks will emerge anytime soon but there are growing players in each side of the traditional banking field. Here’s a list of different businesses where banks are involved and so is a growing number of rivals:

  1. New international online money transfer services
  2. Online basic banking service businesses
  3. Online consumer lending businesses and platforms
  4. Online brokers, ETFs, Index funds and automated wealth and portfolio management businesses
  5. Online insurance providers

The basic banking business such as free money transfers, free online and mobile bank accounts are growing in numbers. They will typically attach credit cards into their business portfolio and take away those revenue streams from traditional banks.

The bigger form of consumer credit is to lend money online as consumer loans. The numerous players in the market have been growing double digit numbers. Lately this development has extended to consumers lending money to other consumers through online platforms. This is both a service for private investors and money lenders taking away the possible private buyers of bank interest funds and consumer lenders.  

The banks service revenue streams are largely coming from sales of broker services, private equity funds and wealth management services. Even wealth management is at risk – there are many fintech companies building automated portfolio management tools that can be sold cheaper than private wealth management services. There are already major players that sell insurances to specific target groups only online, especially in US.

All these companies can also have the next plan. If regulation needs can be automated, why wouldn’t consumer lenders start lending money to buy houses and cars since they are already buying the money from the markets and have an existing customer base. Online brokers could very well start offering automated wealth management services. They are already building customer base, have lean cost-structure and online-marketing knowledge to expand.  

Consumers are learning to choose – it’s not getting easier

It’s the price, fastness and effortlessness that drives consumers to buy from new industry players. For example, Goldman Sachs estimated (Economist 2015) that peer-to-peer lending could reduce profits of American banks by 7%. Statista (2015) says the number of digital transactions will eight-sit in business finance and more than triple in consumer finance by 2020.

In consumer loans the competitive advantage has been to give credit to small household needs even for those neglected by their bank. Getting an answer happens in few seconds after filing out the application and clicking apply on the provider’s online service.

Private equity funds tend to have higher costs then ETFs and index funds that anyone can buy through an online broker. Several studies show that only few private equity funds beat the index. Media has also noticed this topic and it’s been spoken widely. Charging for higher cost on bank’s own equity funds is getting more and more difficult.

We made a study on 2014 about the change of consumer behavior among Y and X generation (see the summary of results in a blog I posted here). The study showed that information search has already shifted to internet and more and more final decisions are made relying on the online information provided by unknown consumers.  

The new players are driven by online and process automation – less workforce, simple products and processes mean less costs and lower price. Consumers appreciating low costs and effortlessness will keep on moving towards new player’s services if status quo remains.

Sales people need to do better

Some consumers are price sensitive but some appreciate service and especially among the X-generation the need to go to the branch and discuss with an expert still stands strong. After all, buying a house or investing your life savings is still one of the biggest decisions people make in their lives and most people want to feel the assurance of getting it right.  

However, if the need is very simple such as opening the bank account and having a credit card, why wouldn’t the customer just choose the cheapest provider available. Logically, the biggest advantage of using bank’s advisory is the situation where customer is applying for loan, needs collateral and has investments.

Most of these needs can be bought piece by piece: house loan from cheapest bank, consumer loans from cheapest online-provider, wealth management solution from cheapest online-provider and so on. The only reason for the customer to pay extra is the competence of the bank and possibility to get everything from one provider. In this case the sales people need to do better.

Some time ago I had a personal experience in talking to quite many banks about house loan, collaterals, investments and multiple insurances. Instead of talking to one person in most banks, I ended up having several discussions and reading many different offers about different financial products. The same as spending my time in checking the online-offering of different providers and buying it all separately. My investing knowledge seemed to be far beyond the sales peoples’. To prevent shopping around, the bank’s sales staff need to learn away from product oriented sales to consultative approach.  

Could banks increase revenue with process automation, customer insight and profiling?

I believe that even the big traditional banks can catch up in competition. If a bank wants to be still providing services to all consumers and businesses, they need to start responding to the competition.

When selling price sensitive products, fast response and low-costs are the key. Regulation increases but most customer connection (FATCA, compliance, fraud detection), valuation of collateral (cars, houses…) and credit worthiness checks can be automated so that the price and answer to consumer comes automatically.

Profiling is the key to understand which are the customers’ individual needs. This determines should a bank offer a personalized service or low-cost product and which arguments to use in marketing it. Instead of traditional segment thinking and massive media campaigns, banks should start focusing on individual personal analytics and narrow target groups. To reach their narrow audiences more emphasize should be put into the extremely targeted digital marketing and advertising.

The same applies to personal encounters between customers and bank’s sales staff. Instead of directing customers randomly to customer service agents or sales reps, the banks should start offering more personalized approach guiding the customer to the right person depending on their expected need and knowledge level. In top of that the sales and customer service people need to be trained to do better with their customers.


Jukka Hyttinen

Director, Marketing & CEM solutions

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