Aşağıda yayınladığımız yazılar, Prof. Dr. Selim Yazıcı’nın Özyeğin Üniversitesi, Financial Engineering and Risk Management (FERM) Yüksek Lisans Programında vermiş olduğu Financial Technologies dersinde öğrencilerin bitirme ödevi olarak hazırladıkları çalışmalardan oluşmaktadır. Yazılar kendilerinden izin alınarak yayınlanmaktadır.
How will the Way of Doing Business in Banking Change?
Hazırlayan: Ayşin Özdil
Information technology which affects the way of our lives is into every aspect of daily life. These technologies have many forms and these forms changes unbelievable. We use it to record, communicate, games, shopping, learning, organize information or daily banking operations. I am working in a Bank and I have some curiosity about how it change our behaviour of finance in banking operations?
The most important features of a Bank are trust and its reputation. If people do not trust the Bank or Banking system, they do not prefer to deal with a Bank or entering the Banking sector. First step should be building trust, then functioning with low costs and finally providing fast service for banks either digital or traditional in the new era.
The 2008 financial crisis and financial scandals (Libor-gate, the foreign exchange (FX) fixing scandal, etc.) have generated an erosion in public trust. Regulators have been very eager to ready new sanctions in the sector after the crisis to reassure the sector. The most important issues for banking are transparency in operations, interbank relations/workflows and risk management to ensure trust. And this disclose a big challenge with the fast and low cost services. Customers (both individuals and businesses) have a huge appetite for alternative systems (or we can define it as a way of doing business) in finance. Devastating and accelerating technological developments inspire the business of finance. Because in the new era nobody has time and money to waste.
FinTech challengers (and startups) positioned to take business from traditional, incumbent retail banks. Their speed depends on the countrys’ regulatory approaches, financial literacy, individuals’ history of financial behaviors. In many countries traditional banking components are at risk from payments and transactions to investing and trading, from lending to risk assessment, from small business banking services to funding and capital gathering. (McKinsey estimated that a stunning 52% of retail banking revenues are at risk, being attacked by FinTech start-ups). For each component we can find many curious startups.
Challenger and Neo-banks
Challenger and neo-banks are founded to change banking and create a disruptive digital bank, keeping costs low and passing the value back to customers. We define these banks as fintech corporations leveraging technology and software to digitize and facilitate retail banking. Challengers mostly use web based or mobile channels to offer competitive retail banking services such as running accounts, savings accounts, investment services, loans, overdrafts, insurance services and credit cards.
Let’s identify challenger banks and neo-banks. While Neo-banks comes with mobile-priority banking experience in partnership with a traditional bank, challenger banks aim at becoming fully-licensed banks, creating new data-driven banking experiences and pricing models.
A neobank is a branchless digital-only bank which works only on digital and mobile platforms. They depend on customers having any financial service with an underlying Bank and corresponding bank license, offer a user-friendly interface and quicker banking solutions. The extent to which customers are aware of the underlying bank relationship day to day may vary. Neobanks are based on self collect data and usage it in their decision mechanisms. The modern platforms they are built on allow them to collect and analyse far more data than traditional banks. These bank analyze their customers behave in the digital app, how, what and how much they spend. The potential, however, is to use this information to create behavioural cohorts that group customers based on all their actions with the product, rather than segmenting them with one or two data points, such as a credit score.
A challenger bank is a small one which is quietly threatening the large ones’ market share. The term includes any new or upcoming bank that has recently gained a license. Above all, it is a small bank that is biting at the heels of the ‘big four’ or ‘big five’ banks. Challenger Banks are “a new breed of technology-driven and customer-centric financial institutions”.
About challengers many studies and reports split into different categories: Embryonic Challengers who are using mainly mobile apps to form partnerships with other banks; Real Challengers who have obtained a banking license in the last five years; and Pseudo Challengers who are the digital partners and startups of existing banks, using both branch and digital channels. On the other hand, a report by KPMG divides challengers into Large (longer established), Small (from the past ten years), and Large Retailers (retailers who have entered the financial services market). So we can say the categories of Challenger Banking are not clear. On the other hand, most of us agree that those banks provides faster, cheaper, customer-focused financial products that have helped disrupt the industry.
A team at Burnmark made a research about challenger banks. This has shown that 43% of all challenger banks around world offer basic products, such as running accounts or saving account. So this result means there is a potential way to go for other products, such as insurance, SME credits, overdrafts, credit cards, mortgage and other investment tools. Big consumer data owners will enter into rivalry with challenger banks; Facebook, Uber, Amazon, Google etc. Some of these companies already have financial services underneath some of their core offerings. Exemplarily it’s possible to send money over Facebook. Or you can easily manage your all payments on Google’s pay service.
Here are some of most important examples for challenger banks and neo-banks.
Atom was founded in 2014. It launched in 2016. It has offered customers savings, business loans and residential mortgages. The Atom app is at the core of the bank, with a 24/7 support team on hand to help with any requests by phone, chat, email and social media, from the City of Durham. 68% of customer calls and 76% of app chats were answered within 20 seconds. Their business model is founded on investment in automated and highly-scalable technologies, combined with straightforward product and service design standards. This cutting-edge initiative of the Atom with providing the individual side of the banking to the digital world maintains with enabling users to check their balance by only looking into the screen or transfer funds only using their voice.
Monzo Bank is a digital, mobile-only bank based in the United Kingdom. Originally operating through a mobile app as a neo-bank and a prepaid debit card, in April 2017 their UK banking license restrictions were lifted, enabling them to offer a current account. Monzo have their data analytics engine hooked directly onto their front-end and back-end systems. This allows them to see how their customers behave in the app, what they spend on and how much.
N26, Starling, and Revolut all have implemented a marketplace model that offers direct integration via APIs to third parties, such as loan and insurance providers. This type of marketplace model has also started to show up in the small and medium enterprises business market. Indeed, Starling Business recently announced integrations with online accounting software provider Xero.
WeBank became China’s first digital bank in December 2014 upon receiving (obtaining) its banking
license. WeBank is devoted to presenting underbanked individuals and SMEs with a variety of convenientand high-quality financial services. Its name comes from WeChat, Tencent’s popular instant messaging and social networking app.
As technology has maintained to develop, Neo and challenger banks and their convenient and accessible ways of banking are expected to change the sector. Neo banks are referred to as web-based banks which provide technology-enabled financial services through web and mobile interface. While, challenger banks are modernized form of traditional bank, which functions without physical offices or branches. Traditional Banks have been threatened by the Challenger banks, Neo banks (digital-only bank) and small start-up apps. Millennials and Generation Z’s behaviors will shape the future of banking. What will be their financial needs? İf they share their personal data with apps and service providers that are not yet fully confidential?? Will challengers gain the trust of customers? These sort of banks have gained momentum in American and European region. (US, UK, Germany) Rising internet penetration and rapid growth in the sale of smartphones, majorly in the developing countries such as China and Australia are likely to open up (launch) new growth opportunities for the market in the upcoming years. (in the near future) It seems to growth trends will continue in the coming years unless they lose the trust.
 The FinTech Book, Susanne Chishti and Janos Barberis, WİLEY
 America’s ‘big four’ banks are JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. United Kingdom’s ‘big five’ banks are HSBC, Lloyds, Barclays, RBS and Banco Santander
This paper was prepared as a class work for Financial Technology course given by Prof. Selim YAZICI at Ozyegin University, Graduate School of Business, Financial Engineering and Risk Management Program.