Banks as we know them could be gone by as soon as 2025, says PwC, so what do they need to do to survive and what does the bank of the future look like?
New Zealand's banks are profitable thanks to growing household and corporate lending and confidence fuelled by better debt servicing by customers. But a new PwC report asks how long this performance can continue under the threat of technology and law change.
"A look beyond banking confirms corporate history is full of cautionary tales about incumbency advantage being lost when companies fail to foresee imminent change," says PwC's New Zealand Financial Services sector leader Bruce Baillie. "Many do not act decisively, radically and quickly enough to maintain their dominant positions.
"With non banks beginning to snap at the services offered by traditional providers, a key priority must be staying on top of the migration of services beyond the traditional banking sector. Already we can see the establishment of equity crowdfunding and peer to peer lending services in New Zealand and new internet based entrants expanding their services around the world."
Kiwi banks also face a threat from European banks who transformed themselves under post-GFC regulatory change, PwC says.
"A hunkering down approach worked for New Zealand 's banks in the medium term but now European banks emerge as fierce competitors with an aggressive and agile approach," says Baillie. "New Zealand banks are facing competition from all around the world on all quarters."
Technology changes, like the rise of software for mobile banking, BYOD and cloud computing, is turning legacy banking infrastructure into a liability, the report says. These new technologies are lowering the barriers to entry for new competitors.
Also, the intangible nature of banking makes it uniquely suited to digitisation and online delivery, says PwC. It adds that banks exiting some activities has created a gap for capital markets to substitute for these offerings, with debt funds or agents evolving as non bank financing vehicles.
"We expect that the barriers to entry for non-banks to provide formerly ‘core’ banking services will continue to decline. The only question is how much of the banks’ traditional territory the new entrants can and will occupy."
The good news for banks is trusted brands will matter as technology changes services. To be part of the future, they'll need to reassert their role in society and invest heavily, PwC says.
"Although much maligned and tarnished by the GFC, banks' brands and reputations remain hugely recognisable and potentially powerful, shored up by familiarity, experience and regulation. Trust and brand matter in financial transactions, some of the resistance to alternative banking providers results from a lack of trust in their security."
Banking services moving away from physical distribution into tech-enabled channels could work in banks' favour, says PwC.
"The friction and inertia for customers in moving between banks and other services providers will decine under the impacts of technology and competition regulation. And as banking service models become more digitally enabled, and financially more about an agency relationship, the value of brands will tend to rise.
"By representing trust, integrity, security and quality of service to the customer, brands could increasingly hep to solve the transaction cost problem of choosing how and with whom to bank."
To fight for relevance, banks need to adapt to regulatory change, work through underperforming assets and misaligned cost structures, change their culture to demonstrate security and integrity and invest in customer services and innovation, says PwC.