An explosion in new technologies has changed the way the world does business. From mobile and online banking, PayPay copycat payment systems, custom analytics, and open integration to barter systems and BitCoin, new options give individuals and businesses better, quicker, and smarter access to financial systems. But the traditional banking world is especially concerned about the impact high tech is having on a generations-old industry.
Here are some examples and why the banks are worried.
PayPal-Type Payment Systems
Banks derive a large amount of their profit from credit card processing. Consumers don’t realize that a vendor pays a fee that is a percentage of each transaction to the credit card company for the privilege of accepting your card. For that reason, many people pay with cash or check when purchasing from a small business, as the fees add up.
PayPal was the first competitor to the big banking monopoly on processing credit cards with an online system that does not require a vendor to jump through the approval hoops required by a bank.
PayPal procedures can be difficult because they work to maintain a high standard of online security, but new technologies that offer equal security are giving PayPal and banks a run for their money. New companies such as WePay.com have streamlined approval of new vendors while offering complete online processing and lower fees. There are also no hidden fees.
Nimble high=tech service providers that come from Silicon Valley rather than Wall Street are quickly developing ways to bank online from Smartphones, iPads, and our computers.
Online banking even allows deposits of checks with new photo capabilities from phones. Just take a photo of the check, send to your account, and it’s automatically deposited. You don’t have to be in the vicinity of your bank to do any banking chores.
While check accounting fees may seem low today, they add up, and the relationships banks develop with a customer ensure an inside track for higher value products such as loans.
Mobile banking has all sorts of concerns for traditional banks because it impacts both personal and business accounts. While customers can access accounts on their phones, it’s the high-fee transactions that come from credit card processing that are being threatened by new competition.
Even PayPay offers a mobile phone processing phone attachment at no charge. This bypasses the credit card processing machine rental fees as well.
Although it’s hard to believe in this day and age that anyone really believes there is any privacy left in the world, consumer concerns about Big Data bring to mind Big Brother, and the backlash has been substantial. Huge amounts of information about each of us and our transactions is naturally compiled, and the theory is that the data is used to customize and improve the customer experience. From a marketing perspective, banks and other large institutions use Big Data to more cleverly create and promote products to market segments.
Big Data has driven many potential customers to new smaller startups that are not as threatening as big corporations. The loss in customer base is substantial and of great concern to banks.
It may be a long time before alternative currencies like BitCoin take hold, but there are examples — like in Switzerland — where barter-based systems have tens of thousands of users. Banks are watching these new money systems closely, and only time will tell if they take off.
All in all, it’s a revolutionary time in the world, driven by new technologies that are causing a paradigm shift. Banking is no exception, and it will be interesting to see long term how the new models fit into the financial landscape.
Join TechMeetups FinTech Drinks & Demo Night! #TMUdrinks @Bloomberg