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The digitization of financial sector and banking

Few days ago, I was going through the Polaroid photos of my family, those pictures not only took me to the childhood memories but also reminded me the fall of an innovative company named Polaroid, a company which changed the photography industry with its innovation, instant cameras.

Polaroid is considered as an example of a company which conquered its market but miscarried its position by not transforming itself to the digital world.

Small start ups are coming up with bigger challenges for stable banks and other players in financial services.

Similar situation has started to hit the shores of our banking industry where technologically driven companies (Fintechs) are coming up with financial solutions for consumers and businesses and disrupting conventional banking.

In late 2014, Lending Club raised around $1 Billion through its IPO. Lending Club is the world’s largest online credit marketplace, facilitating personal loans and business loans. It offers low interest rate loans through a fast and easy online or mobile interface.

By operating fully online with no branch infrastructure and with the usage of technology Lending Club gets itself out of brick and mortar banking and lowers its cost of operations significantly, which is passed on to its borrowers in the form of lower rates and investors in the form of striking returns.

In USA since 2009, the number of bank branches has dropped slowly but steadily for seven years, with annual decreases ranging from 0.4 to 1.6 percent.

In the FDIC’s latest reporting, the number of branches stood at 90,269 from 98,395 in 2009. According to Keefe, Bruyette & Woods, a financial services research firm over the next decade, as many as half of all U.S. bank branches will disappear.

Now there lie two questions whether banking industry in developing countries like Pakistan needs to transform itself and how Fintechs can be a competition to conventional banks in developing countries.

So here is the answer, around more than 2.5 billion of the world’s adults don’t use formal financial services, and out of that 2.5 billion roughly 60% of those adults belong to developing economies.

So the opportunity is bigger for financial players present in under developed countries to grow their business. We have two good examples how Fintechs challenged conventional banking and tapped the segment which was unbanked, one example if os Easy Paisa by Telenor and the other is M-Pesa in Kenya.M-Pesa Safaricom’s wildly popular mobile money platform has helped to increase financial inclusion which was previously under 30% to over 65% in less than 10 years.

In China, e-commerce giant Alibaba and TenCent have started popular mobile wallets, and are targeting to offer other financial services. Considering the market size, opportunities and untapped customer segments under developed countries will witness incubation of more and more FinTechs with the ability to disrupt conventional banks and it is the time for our banks to transform themselves.

Referring to the debacle of Polaroid, the main gap lied in Polaroid’s logic towards understanding the changing market, its management assumed that consumers will always be needing the hard copies of their pictures.

Hence Polaroid continued to invest heavily in digital imaging to improve the quality and chemistry of photography, owning the whole value chain from camera to film to print.

While Canon, Nikon concentrated on camera on their core strengths to improve the optics and electronics, and made the evolution from film to industry digital memory devices, collaborated with OEMs on standards to provide convenience to consumers by offering print directly options from the camera to compatible printers, and even WiFi-enabled their cameras and now we all know where stands photography industry now.

Several companies lasted the transition to digital imaging by focusing on what their customers wanted, even if it required the abandoning of existing business model.

Now banks needs to make an assessment whether they have skills in terms of strategic direction, technology and human capital to make a transformation towards a tech driven company which understands changing customer insights (millennials), offer new products, lower cost of its operations and finally banks will have to make a meticulous choice, either collaborate or compete with FinTechs to be part of transforming banking industry.

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Disclaimer: The views expressed in this article are solely of the author and do not represent ARY policies or opinion.

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