Economics of Money and Banking PDF

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How innovation and developments in the financial sector of the western hemisphere countries have impacted the distribution banking sector...

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Impact of innovation and developments in the distribution banking sector 1

Economics of Money and Banking How innovation and developments in the financial sector of the western hemisphere countries have impacted the distribution banking sector

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Impact of innovation and developments in the distribution banking sector 2 Introduction The distribution banking sector has seen an unprecedented changes in the scale and scope of the technological and innovation growth over the last 30 years. However, the pace has greatly increased over the last 10 years as evidenced by the innovations and harnessing of technology by banks. Technology and innovation in the banking industry has core for growth and survival. Banks’ ability to compete effectively is now defined by its own ability to leverage and profit from newer technologies (Allen, Rai and Rai, 2007). However, digitization has been happening faster than most banks have been able to handle leading to collapse of several of these financial institutions over the last three decades while ushering new and more powerful institutions. The key driver for these innovation and technological advancements in distribution banking has been the ever changing consumer expectations and progression of ecommerce with most notable ones including Amazon, Google, Facebook and Apple whose operations span across western hemisphere countries (Campanella, Della Peruta and Del Giudice, 2015). The issue of distribution banking has received attention because it has been hailed as pivot factor in determining the bank’s ability to compete effectively in the banking sector. With the increased competition and deregulation of the banking industry, superior distribution banking strategies concerned on effective delivery of products and services to consumers has effectively provided institutions with utmost competitive advantage. Distribution has provided banks with basis for differentiation rather than the core service itself (Peare, 2003). More specifically, emergence of telephone retail banking and home based banking with major successes being recorded in First Direct, a subsidiary of Midland Bank through the use of SMS banking (Devlin, 1995). This marked a significant move away from the traditional branch based delivery/distribution mechanisms, mainly driven by factors on both supply and demand sides of the banking industry (Mester, 1992). The paper argues that technology has

Impact of innovation and developments in the distribution banking sector 3 been the key driver of innovation in distribution banking sector and these developments have been core to banks’ ability to survive and grow in the highly competitive, with each player seeking to harness technology and provide highly differentiated products and services as a method to attract and maintain customers. The aim of this paper is to examine how the new and less new developments have impacted distribution banking sector. On the other side, Western Hemisphere economies have seen a steady growth over the last 10 years, although the global financial crisis experienced in 2008 affected this growth with the huge impact being felt in the financial sector, the core sector of operations of banks. However, the UK, US and Canadian economies have gained much momentum with economies of Latin American and Caribbean countries lagging behind (IMF, 2015). These lag led to creation of multinational financial institutions such as the Inter-American Development bank to accelerate economic growth in Latin American and Caribbean countries. The banking distribution scope There has been a paradigm shift in distribution banking sector As depicted in this diagram, trade has shifted from traditional cash and carry to web based transaction of order and delivery with payments being facilitated online. It has led to paradigm shift once the supply side and the logistics business model were matched with people’s tastes, preference, awareness and feelings about the ecommerce creating trust, which is core for business (Narduzzi, 2002). For instance, after the Bank of England removed the clearing bank interest rates cartels in 1970’s, there have been a radical shift in the UK’s distribution banking. The successes achieved influenced authorities in other western hemisphere countries such as Caribbean and Latin American countries to change their attitudes towards regulation and competition. As a result, these radical changes were amplified throughput many countries. These led to formulation of clear winning strategies

Impact of innovation and developments in the distribution banking sector 4 such as huge product and services varieties offered, improved efficiency and clear cost reduction strategies in the distribution banking sector. Hence, notable shifts in traditional banking value chain has led to emergence of new payment methods such as prepaid credit cards, mobile payments, P2P and NFC for micropayments. As a result, there are now card less payments, ATM-cash out, MyOrder and NFC being facilitated by processors such as PayPal, Wave, We Pay, Stripe etc (Rega, 2017). In addition, it has led to changing usage of bank branches thus shifting banking business from traditional transactional banking to personal banking (Mester, 1992). As a result, majority banks in Western Hemisphere countries have adopted these approaches with most dominant presence being in US, UK, Canada, Australia and European countries. E.g., OCBC bank, Bank of America, HSBC, etc. Thirdly, these changes have led to emergence of internet only and mobile only banking distribution to facilitate direct banking, mobile only retail, savings and direct banks. Examples include Atom Bank in UK, Fidor Bank, Sterling bank, Monzo Bank and Tandem Bank in UK, PNC’s virtual wallet, Charles Schwab bank, Ally and GoBank (Bhadange, 2018). Direct banks have reduced the huge costs of maintaining physical bank branches. Many banks in western hemisphere countries are moving towards adoption of direct banks to reduce costs and increase competitiveness. It has led to emergence of Value Added Services (VAS), as a way of enhancing competition in the distribution banking sector. As a result, Loyalty programs and discounts. Examples include Citibank’s Thankyou program offering points based on monthly transaction activities. The VAS programs has been amplified in majority of banks in Latin American countries and Caribbean countries as way of retaining customers through various innovative loyalty programs. Shopping and loyalty have already been incorporated in the core banking business

Impact of innovation and developments in the distribution banking sector 5 as evidenced in some markets such as UK, US, Canada and Some European countries where it is virtually impossible for a bank to compete effectively without having some discount plans loyalty programs. Caribbean and Latin American markets are on the way because differentiation in distribution banking sector is becoming an increasing challenge for banks requiring many retail banks to push for these value added services as a competitive tool Further, it has attracted Mobile based Network operators (MNOs), payment scheme providers and intermediaries who are seeking new roles and forging partnerships with banks because of reduction of revenue collection using the old streams, as a way of positioning themselves and also in development of new ventures (Marous, 2013). Mbank and Visa are some examples. These new partnerships have created new avenues for banks to generate more revenues and provider a wider range of services to their customers. As a means of furthering these partnerships by reducing costs, Agency banking, branches-in-stores, retailers, MNO agents and correspondent banking have emerged as new ways of fostering partnerships with intermediaries. Accelerated growth over the last 10 years Over the last 10 years, less new developments have ushered in new and more efficient products and services. Physical branches where customers used to queue to get bank services have been replaced with Instant Voice Messages leading to seamless banking system desired by customers (Bakare, 2015). Further, client visits to physical branches have been replaced with call-centres that provides 24/7 support to clients. The previous agency banking and other form of partnerships with third parties are continuously being replaced with mobile and online banking models further accelerating banking into new and unimaginable modes (Bakare, 2015). Other physical distribution channels that have been replaced with virtual channels include vehicle banks, container banks, door step banking and branchless banking

Impact of innovation and developments in the distribution banking sector 6 which are all being replaced by email banking, television banking, SMS banking and existence of information centres to provide information to customers (Rotimi Adagunodo, Awodele and Bamidele Ajayi, 2007). Besides, banks in Caribbean and Latin American countries where internet penetration is not deep have adopted the SMS Mobile Banking to ensure customers do need access to internet to access banking services. However, developments and innovations have also attracted third parties in the distribution banking sector increasing competition. These have been mainly third parties issuing the prepaid value cards and FinTechs. The threat of Fintech to the banking system is captured in Bill Gates Famous quote ‘We need banking, but not banks’. Threat of third part issuers of prepaid value cards These have been issued for low-value payments, vouchers, gifts and regular value disbursements targeting people with poor credit history, the young people, for travel and to enable remittances. They have made payments a lower value business because of advancement in mobile payments thus becoming less locked to the traditional current account system operated by the banks (Allen, Rai and Rai, 2007). Third parties have been issuing these cards at a higher rate than the banks. However, these has come at a cost to the distribution banking sector because of their costs, the high exposure to fraud and potential loss making in markets where it is difficult to charge for transactions thus offering lower value to the issuer bank. Further, they are not necessary a core part of business for future operations (Narduzzi, 2002). Besides, in many markets especially in Latin American and Caribbean countries, card inter-operability has remained a major challenge and control of cards has been impossible. Some Prepaid Card issuing parties have added value to the basic payments as a strategy for differentiation posing further challenge to banks. For instance, Google Wallet which was proposed as an independent e-value system includes features for

Impact of innovation and developments in the distribution banking sector 7 loading commercial credit cards which is also combined with other basic offers, Square Wallet which allows for acceptance of credit card with new payment and retailer models, Dwolla which is an e-value platform that seeks to allow customers to avoid credit card fees while making payments and Amazon payments. Threat of FinTechs in distribution banking FinTechs are high tech start-up companies which have emerged over the last 10 years and have embraced technology and innovation to compete with banks in the banking industry. They have focused on offering highly customized products and services for consumers. More than half of the Survey respondents in the US and UK had heard of alternative providers such as USAA, Venmo, PayPal, Free Agent, Bud and Funding Circle (Marous, 2017). Consumers cited their preference to FinTechs because of flexibility, availability and quick access of their products and services which reflects the rising consumer expectations, threatening revenue loss for banks which fail to adopt to the fast changing technology (Marous, 2013). However, banks have innovated new ways to counter the threat and the most successful have been partnering with FinTechs, whereas others prefer to buy them to eliminate their threat. Although they have been the major source of advanced innovation in distribution banking industry, majority of them experience difficulties in achieve huge scale operations thus making partnering prospects highly common (Marous, 2013). According to CB insights, FinTechs start-ups across the globe received $17.4 Billion of funding in 2016, highlighting that FinTechs would continue to shape the distribution banking sector in the future (Evans, 2018). Their diversification in other areas such as Cryptocurrency, digital cash and block chain technology will act as a pivot to reduce their operations in the traditional banking sector, which will give some relief for banks (Eriksson, 2008). Innovation and Technology Disruptive forces

Impact of innovation and developments in the distribution banking sector 8 New technologies combined with advanced innovations will continue impacting the distribution banking sector. This will produce major forces that will keep shifting the competitive landscape of the industry and hence banks have to increase the speed of adoption of technology to leverage on new innovation and harness higher profits, a core activity for their survival (Allen, Rai and Rai, 2007). New technologies will continue accelerating the commoditization of cost drivers. Secondly, profit pools between value chains will keep shifting with advancement of technology lead to more profit redistribution between banks and third parties in the industry. Thirdly, bionic workforce such as Artificial Intelligence would continue impacting distribution banking sector (Marous, 2017). Other factors will include new and diversified platforms for delivering products and services, data monetization and financial regionalization (Marous, 2017). However, innovations and developments have occurred at a faster rate in US, Canada, UK, and Some European countries and hence banks in Caribbean and Latin American countries have to embrace and leverage on innovations and technology which are greatly shaping up the sector. Conclusion In conclusion, unprecedented innovations and technology have led to rapid changes in distribution banking sector. This has led to stiff competition among banks in their attempt to harness profits from new innovations for survival and growth. However, the main undoing of these developments have been the ease at which innovations in disruption banking sector are easily copied making it difficult for organizations to remain competitive through a unique differentiation strategy. Further, more heterogeneous consumer preferences have made the delivery of banking services an important issue (Devlin, 1995). As a result, a paradigm shift has been experienced in the distribution banking sector with the traditional roles of branch

Impact of innovation and developments in the distribution banking sector 9 networks being phased out by virtual networks which have significantly reduced transaction costs while easing access of services to the customers. Therefore, because these changes will continue evolving over the foreseeable future while having a huge impacts on distribution banking sector, embracing the new technologies, innovating new products and services and partnering with FinTechs will form the basis for differentiation in the industry (Eriksson, 2008). Further, partnerships with mobile network operators will be crucial because of MNO’s have large customer base which can be harnessed by banks. This is because the new developments which have been experienced in the last 10 years have caused huge changes in the traditional banking industry eliminating the role of branch networks and hence the paper predicts that these roles will be completely phased out by advancement of new and more innovative technologies in the near future.

Bibliography

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