What sort of a future awaits the banking sector? This morning, BBVA Executive Director José Manuel González-Páramo gave a 360-degree view of that future, during a speech at the opening of the academic year at the Fundación Sant Elmo in Seville. Banks, he said, face two possible scenarios: one in which they remain static, and which will cause them to disappear; or a transformative scenario, which implies a complete reinvention of the sector.
In González-Páramo’s view, in the coming years, banks will have to use a wide variety of strategies in order to succeed. Possibly, only a combination of all of them can guarantee a bank´s survival. Financial institutions will have to become universal providers of financial services, with personalized digital solutions based upon knowledge of their clients and a cost structure that allows them to compete.
Banking at the crossroads: act decisively or go with the flow
José Manuel González-Páramo explained that the consequences of the economic and financial crisis, combined with accelerated technological change, have thrust the banking industry into an existential crisis. This phase of the history of banking will reshape it into something radically different than it was during the first decade of the millennium.
In his opinion, this radical change puts banks at a crossroads, where there are two choices: they can either adopt a passive, or reactive, strategy, acting only in response to the multiple challenges that confront them; or they can take a proactive role, putting the focus on innovation.
What will the banking industry of the future be like?
The BBVA Executive Director foresees two possible scenarios for financial institutions. In the first, banks will evolve into mere suppliers of infrastructure, leaving the high-value services to other providers.
In his opinion, getting to that phase won´t be difficult, as it’s an inert scenario: it would simply require that things continue to be done in the same way they have, both by the banks and by the regulators.
He explained that the concept of banking as a platform is related to this vision, inasmuch as banks would be relegated to the role of mere providers of APIs (Application Programming Interfaces). The banking industry would become a supplier of financial products and services that connects to third parties (platforms), which market those products and services and maintain the relationship with final clients.
On the other hand, in the second scenario, growing competition would lead to a transformation of the sector, in which only a few of the current banks survive – those that undergo a metamorphosis, becoming entities that have little to do with the current ones.
Likewise, he believes the transformation that will lead to this latter scenario will arise from the strong competition to maintain or to win the confidence of customers. The BBVA executive director stressed that the new companies offering financial services are able to offer attractive products based on a superior user experience and a less rigid cost structure, one that allows them to offer better prices.
Specifically, José Manuel González-Páramo anticipates strong competition on the part of the banks and the new entrants, one in which success will be determined by their capacity to care for their three principle assets: the customer, confidence and reputation.
Lastly, in his opinion, banks will have to provide an experience that meets the expectations created by the digital native companies. This translates into lower prices, the automation of certain processes and consulting services. In short, the main beneficiary of this whole process will be the customer, who will be at the center of the business model of the new banking industry.