The role of the financial institution is constantly changing, as banks grow, merge and reinvent themselves. While financial institutions have been trying to become bigger and more nimble by buying each other, new players in the payment space have been taking their share, as well. These newcomers are not banks at all; they are customer-centric companies such as Google, Apple and Amazon.com — companies that just happen to know all about gathering and analyzing customer data.
These nontraditional players are not about to start offering checking accounts and car loans any time soon, but they are threatening to take a share of fee income from what has traditionally been the domain of the financial institution. These companies have a significant investment in IT infrastructure already. They are processing millions of payments through credit and debit cards. And they are not constrained by Dodd-Frank and other regulations to which banks are subject.
The mobile payments business is particularly susceptible to these organizations. While banks are trying to understand the potential of this market and exploring how to create the necessary infrastructure, technology companies are analyzing the customer data they have mined already and planning how to use it to increase wallet share. Add to this the consumer perceptions that banks are all about fees and tech companies are all about convenience and customer service, and the threat is clear.
Banks will need to invest in new payment technologies to compete with these nontraditional players — no small task when interest rates are so low and regulatory and compliance costs are so high. And given that the existing IT infrastructure in most banks is not geared toward creating new products, true innovation will require a significant shift in resources. Banks that can overcome these hurdles, however, will have a major competitive advantage for many years to come.