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THE BANK AND THE DIGITAL REVOLUTION

THE BANK AND THE DIGITAL REVOLUTION

Historians of science consider that the digital revolution underway is the fourth industrial revolution; the first was characterized by the use of the steam engine, the second was marked by the growth of electricity, oil and chemicals and the third by the development of information  and communication technology.

The previous revolutions profoundly changed the societies of the 19th century and the 20th century. The present digital revolution is transforming the society of the 21st century. Let's consider the impact that businesses born just 25 years ago have in our daily lives.

Google, both newspaper, library and encyclopedia, aims to organize information in real time on a global scale and make it accessible to all; everyone is potentially both a producer and consumer of the data and information disseminated by Google. The neologism "prosumer" forged in 1980 by the Futurist Alvin expresses this new situation well.

Three centuries after Diderot and D'Alembert, Wikipedia has launched an encyclopedia, but an online encyclopedia, collective, universal and multilingual; an encyclopedia written by everybody, and not by some scientists; any person may, at any time, freely and voluntarily, create, modify, improve or use content, provided that the contribution meets the conditions of verifiability, eligibility and cordiality.

Amazon, a global online bookstore, allows anyone, without moving, to buy, sell and deliver books at home in just a few clicks.

Airbnb is a paid community platform for renting and reserving homes: any individual can, from anywhere and at any time, rent or lease a home.

Uber is a technology platform that brings together drivers of cars with drivers and passengers through mobile applications. Everyone can rent his car, anyone can at any time and for any trip hire a vehicle. Uber has undoubtedly changed the consumption habits of transport services in the countries where it operates.

And the list could be longer.

 

The distinguishing features of the digital revolution

The distinguishing features of the current digital revolution, observed through the use of the platforms mentioned above, are :

1) The laptop, the tablet and the smartphone are at the heart of the digital revolution.

Indeed, all interactions with companies born of the digital revolution, especially those mentioned above, are made from a smartphone, a tablet or a laptop, tools almost indispensable to the man of the 21st century.

2) The Internet of Things is gaining every sector of life.

The digital revolution is also marked by the omnipresence of the internet in the the objects that surround us.

Today, in logistics, sensors make it possible to follow the traceability of the goods and improve the management of the stocks; in home automation, smart sensors and meters help to manage energy or water consumption, and to monitor the security of property (theft, fire alarm); in health, connected watches and wristbands and other sensors help monitor the vital functions of humans; in insurance, connected cars allow the insurance premium to be adjusted according to the kilometers traveled, the routes taken, the way of driving and the condition of the vehicle. The bank will not escape the omnipresence of the Internet of Things.

3) The advent of the consumer-producer era

Yesterday, there was the producers of data and information on one side and the consumers on the other. Today, everyone is both consumers and producers, or according to the neologism of Alvin Toffler, prosumers.

4) Abolition of temporal barriers

Yesterday, the questions and answers were in the course of time : the questions at first, the answers in a second. Today, the digital revolution has brought us into the era of immediacy and meets the impatience of modern man.

5) Abolition of space barriers

Yesterday, the economy was spatial ; today, it is more and more a-spatial, in many of its parts; it will be more so tomorrow. Yesterday, we had to travel to go to work or to complete some administrative formalities; today, the digital revolution is abolishing the space barriers and often allows, whatever the place where one is, to work, to deal with his bank, his town hall or his favorite store.

6) Universality of the network

Yesterday, none of the existing networks (transport, telecommunication, ...) pretended to be universal, ie to be able to connect all men. Today, the internet does this, or almost the blockchain, which, beyond a traceability and increased security, allows to create collaborative distributed networks where all actors are guarantors of the reliability of the system.

 

The challenges of the banking sector in the digital age

The financial sector in general and the banking sector in particular have not escaped the onslaught of this digital revolution. Also, traditional banks, in my opinion, face the following challenges to remain strong and innovative economic players of the 21st century. 

1) The challenge of taking into account current customer practices

The omnipresence of the internet, the democratization of the smartphone and the spread of the digital revolution in many sectors are changing the consumption habits of people all over the world.

For the banking sector, today, customers are moving less and less to their agency for the most common operations, given the changing lifestyles and different management of available time. From home or any other place and at any time, everyone can in a few clicks carry out their operations, without wasting unnecessary time in journeys and queues or waiting rooms. Technological progress allows this abolition of spatial barriers, the difficulties of urban mobility justifies it.

Progressive abolitions of spatial and temporal barriers are undoubtedly a strong marker of the digital revolution.

2) The challenge of controlling operational costs

Banks have a natural tendency to increase their costs at all levels: commercial, information systems, regulatory investments; investments in human capital; investments for the opening of agencies.

One of the many virtues of digital transformation is ultimately helping to reduce banks' costs or, at least, reducing their structure, through on-line processing of current transactions and structural changes through improved business processes, organizational changes and the evolution of the business model. The well-conducted digital transformation in the bank is a source of productivity gains and a profound change in the work of the client advisors, who will carry out fewer common tasks and more advice.

3) The challenge of risk management

Historically, but today more than yesterday, banks must protect themselves from increasing operational risks, including those related to financial fraud, cyber-attacks, money laundering or terrorist financing. Risk management is and will remain a major challenge for banks, given the volume and variety of data they handle. Without a doubt, digital will help meet this challenge, thanks to the data collection and processing capabilities it allows. Indeed, the current tools make it possible to aggregate multiple sources of data, whether they are public or private databases. Thus, any bank employee who has begun its digital transformation, can have access in one click to a fairly complete view of the financial situation of a client company.

4) The challenge of regulatory requirements

The regulatory framework that banks have to comply with is becoming more and more demanding over the years: the recommendations of the Basel Committee have followed one another: Basel 1 in 1988, Basel 2 in 2004, and Basel 3 in 2013. It must take into account the new technological situation, more and more.

The challenges of regulation and compliance are already immense, they are even more so with the new opportunities that digital offers to banks.

5) The challenge of technological innovation

The financial sector has distinguished itself in recent years by the arrival of new players using their technological expertise to rethink and transform today's financial and banking services. This is the case of Paypal, Google Wallet, Apple Pay, Wari, Orange Money, M-Pesa. To mark their territory and stay ahead in financial services, banks have an obligation to meet the challenge of innovation that fintechs have launched.

On the other hand, one of the major challenges of technological innovation in the banks is the place they will give to artificial intelligence.

Artificial intelligence in the bank has the significant advantage of improving the performance of bank employees. It allows customer advisers to deliver to their customers better advice on the entire product line ; For this, it rids them of time-consuming, repetitive or tedious tasks, such as processing simple requests from customers by phone, email or chat. Examples abound : At Orange Bank in France, for example, artificial intelligence took the form of a chatbot, or conversational robot, which can answer customers' questions 24 hours a day, even if they are personalized, and trigger certain actions. , like blocking a credit card. At Crédit Mutuel in France, bank advisers have virtual assistants to sort email, prepare answers and provide personalized information to customers on products more quickly. In the most advanced banks, artificial intelligence allows a robot to respond directly by mail or voice synthesis to customers.

Artificial intelligence will also have applications in other areas of the bank: fraud detection, cost control, invoice processing and deepening of customer data.

6) The challenge of competition fintechs

Over the last 25 years, banks have seen formidable competitors, with their technological expertise, much more innovative, more agile and cheaper. These are online banks and fintech players.

Online banks are banks accessible only through the internet. They offer the same services as traditional banks. They have the following advantages:

- They allow their customers to complete all their online banking operations, without having to move to an agency, which is an appreciable time saver; in France more than 50% of the customers went to their branches in 2010, they are only 21% in 2015;

- They have counselors available online and by phone over extended time slots, often until 9 pm and 6 days a week, which allows clients to get support a good part of the day;

- Online banking rates are very often lower than those of traditional banks, because they have less fixed costs (no agency, fewer advisers ...). They are even free for certain products and services : bank cards and current transactions carried out on the internet.

The Fintechs (contraction of the terms "finance" and "technology") are innovative start-ups that use the new information, digital and artificial intelligence technologies to offer financial and banking services less expensive and more adapted to the behavior of the customer today, in terms of speed. The Fintechs have distinguished themselves in the following areas: digital banks, retail financial services platforms, business financial services platforms.

Digital banks or neo-banks are banks without agencies and accessible only from a mobile phone. They compete with banks in their traditional business lines. Their birth follows the unprecedented success of the smartphone.

They have the following peculiarities:

- They are aimed at a wider, perhaps less affluent, public than that of traditional banks, because they do not impose barriers to entry; By way of illustration, it should be noted that Orange Money counts in Senegal nearly 1.5 million of active customers, when the largest bank in the country has a little more than 300 000 ;

- Account openings are made in a few clicks ;

- They are accessible at any time and from anywhere ;

-most of their services are free or quasi free ;

- Their mobile applications are generally more innovative and give a lot of comfort and responsiveness.

For the time being, many mobile banks are essentially payment institutions, although some, more and more numerous, tend to apply for a banking license or even to be bought by major banking groups.

Retail financial services platforms have grown rapidly and have had spectacular success at the grassroots level. Competing banks, they offer basic financial services such as money transfer, payment of bills, including water, electricity and telephone, payment cards, telephone credit recharge.

Wari in West Africa and M-Pesa in East Africa are quite representative of the impact of these platforms in people's daily lives.

Business financial services platforms have also begun to grow and offer a variety of services, including online currency transfer, such as Kantox, and paperless factoring, such as Finexkap.

The crowdfunding platforms bring together, on the one hand, project initiators, creators, traders, SMEs, and, on the other hand, investors, individuals or professionals.

Crowdfunding, the principle of which is to collect a multitude of small sums to finance more or less important projects in various fields, can take different forms:

- The donation : The contribution is voluntary, but the contributor can receive in return a reward in the form of a gift;

- The loan: the contributor grants a loan and expects, in return, the repayment of it;

- Equity Participation : The contributor takes a stake in the capital of the financed company and hopes to receive dividends in return.

KissKissBankBank is an example of crowdfunding in the form of a donation; October, formerly Lendix, an example of crowdfunding in the form of a loan; Sowefund an example of crowdfunding in the form of equity participation.

7) Optimize data collection and management

The ever-increasing severity of regulation and the increased harshness of competition make it vital to have a good knowledge of each customer, each competitor and the economic environment. Thus, the collection, analysis and management of data become major issues of modern banking. Improving the banks' performance requires the deployment of a refined and more targeted analysis of the data and their operationalization in real time.

8) The challenge of training

The evolution of banking business lines,  that of technology and knowledge and the increased level of competence of the clients make the training of the bank employees, in particular the commercial one of the main levers of the success of the banks. As far as digital training is concerned, it must be disseminated throughout the bank and must be for all employees.

Faced with the digital transformation underway everywhere, the banking sector must seize the opportunities it offers and make it a driving force for its development. In order to do this, traditional banks must immediately take ownership of digital technology, either by developing fruitful partnerships with fintech players or by buying them. Such an approach is indispensable because:

- Customers and investments are moving significantly towards products and services developed and marketed by fintechs and online banks; this trend is clearer with the younger generations of today, who are the consumers of tomorrow;

- It allows banks to make a considerable qualitative leap, by appropriating the technological expertise and agility of fintechs. Some banks have understood this well by buying or incubating these new players. This is the case of Nickel bought by BNP Paribas or Leetchi by Crédit Mutuel Arkéa.

- It allows traditional banks to have more power and responsiveness, faced with the inevitable onslaught of the giants of the telecom internet, who have a perfect command of digital and marketing and have a considerable financial strength. This arrival of the big groups of the Internet and telecoms already knows a beginning of reality: Orange created Orange Money in Africa from 2008 and Orange Bank in France in 2017; In partnership with the Nouvelle Société Interafricaine d’Assurance (NSIA), it is preparing to set up a digital bank to offer retail banking, microcredit and insurance services in West Africa. In Canada, Canadian Rogers Communications created Rogers Bank in 2013. Google launched Tez, a mobile payment service dedicated exclusively to the Indian market. Amazon has begun negotiating with several US banks in order to market soon a current account. Many internet and telecom companies are showing interest in the banking sector.

 

All in all, the digital revolution is irreversible and affects all the sectors of the economy and society. It presents many challenges to the banking sector, but above all it opens up many opportunities. If traditional banks take advantage of these opportunities, the famous phrase given to Bill Gates "We need banking but we do not need banks anymore"* will remain anecdotal.

 

Mamadou SENE

Former Bank Managing Director

mamadousene.pro@gmail.com


Published at 13/02/2019

  AMF .



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