The Digital Banking Revolution: How Fintech Companies are Transforming the Retail Banking Industry Through Disruptive Financial Innovation by Luigi Wewege

Chapter 1 Introduction
Banks have always fought to gain absolute power and market
share, knowing their competition and serving a marketplace that
had relatively few alternative choices. However, the battlefield is
changing as financial technology advances and new players
emerge. Today, financial customers have become restless,
demanding more from their financial service providers than ever
before. Many retail banks around the world have now reached a
pivotal moment in their history, and they need to transform
through financial technological advancements to stay relevant,
or risk the possibility that agile financial start-ups could confine
them to a limited utility role. This challenge comes at an
inopportune time for retail banks just as industry profitability is
stagnating and customer loyalty is becoming even more
tenuous.
Regional banks experience an average of 11% attrition
overall, and as much as 20–25% for first-year accounts. One
study by consultants Bain & Company concluded that on
average, 29% of regional bank customers would change banks if
it could be done easily. In fact, the time and effort involved in
switching banks is an outstanding reason that many customers
do not switch banks.
At the same time, regional banking is growing quickly,
adding fierce competition to the market, with rapid change
continuing to intensify. For example, with narrowing spreads
between long-term and short-term lending, profits are being
squeezed and regional banks are being forced to streamline
their cost and expense levels.
These banking trends are not the same as those of the
distant past, when growth had everything to do with increased
customer accounts and savings rates. Today, dominated by
fintech trends, banking has changed completely.
To illustrate how rapidly new technology can transform an
industry, consider that it took just 18 months for Google to erase
85% of the market capitalization of the biggest GPS companies in
the world after the launch of its Google Maps app. Alibaba,
China’s equivalent to Amazon, became that country’s largest
multinational holding company only nine months after entering
the market.
These examples show how today’s technology-enabled
disruptors can dramatically change markets in a short period.
For many, the first real disruptor to enter the banking sector in
the current era was PayPal. Initially, traditional banks treated
PayPal as an annoyance, limited to eBay and with little potential
to disrupt the highly lucrative and bank-dominated payments
industry. How wrong they were. At the end of 2018 it had $15.45
billion in revenue, and was more valuable than its parent eBay,
which booked $10.75 billion in revenues in 2018 and has been
growing at about 8% per year. PayPal revenue for 2019 are
estimated to grow to $18 billion. Average revenues are growing
at 18% per year.
PayPal has paved the way for the payments space to be
transformed, with popular retailers having also shown
remarkable success moving into payments. It’s all about
convenience and speed. Banking under the PayPal model
doesn’t even require leaving home; and it doesn’t end there. For
example: the Starbucks Rewards loyalty program handles 30% of
the company’s United States-based transactions, and 1.9 million
new customers signed up to the program in 2018.

The Digital Banking Revolution: How Fintech Companies are Transforming the Retail Banking Industry Through Disruptive Financial Innovation by Luigi Wewege