Implications and Potential Solutions Regarding the Digital Disruption of Financial Institutions

by Sarah Grotta 0

The Financial Brand posted an article providing its analysis of the impact of digital disruption on the financial institution market.  Its rather sobering, but not alarmist.  What this article does, (which by the way, many other articles do not) is to provide some high level suggestions on how to tackle the issue.  They may not be relevant for every institution but it’s a good starting point for planning purposes and an overall good read.

First a sizing of the issue:

if the financial services industry does not rethink distribution, and if retail and corporate customers switch their banking to digital companies at the same rate that people have adopted new technologies in the past, the industry’s ROE (absent any mitigating actions) could fall by roughly 4.0 points, to 5.2 percent by 2025. This is close to the levels experienced in 2008, during the worst of the 2008 financial crisis.

 And a list of the implications, that are beginning to materialize already, if financial institutions don’t change:

First, and foremost, banks face disintermediation from their customers as consumers switch to non-traditional banking channels and sources.

Today, banking products and services are impacted by unbundling, with consumers picking and choosing selected providers (like PayPal) to handle parts of their banking relationship.

The third effect of digitalization of services is commoditization, where financial services organizations have difficulty differentiating themselves as consumers compare increasingly transparent offerings online.

Finally, financial institutions are losing brand awareness and struggling with invisibility as customers can increasingly access financial services without knowing the actual brand of the institution

Overview by Sarah Grotta, Director, Debit Advisory Service at Mercator Advisory Group

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