Digital competition is upending the banking industry, nowhere more so than on the retail side. Firms such as Chime, Nubank, N26, and more recently, Square, have entered this field. These fintechs are able to use their digital agility to better tailor offerings to clients and create a sense of a bank for the people, without all the negative connotations that large banks carry. Because they are digital-first banks built on the cloud, they have better digital user interfaces than many traditional banks. This is indirectly pushing traditional banks out of the industry, not necessarily because they can’t survive, but because they don’t want to.
Retail banks shutting down operations
Several traditional banks are closing down both their branches and their retail operations. HSBC is aiming to exit US and French retail banking. Yet HSBC is facing no immediate balance sheet threat to throw it out of business. In fact, the bank is actually going through a worldwide restructuring, moving its key management to Hong Kong as it targets the Asian market. But this APAC-focus is also not why the firm is looking to cash out of its retail business.
Wealth takes precedent
The real reason is because big banks would rather focus on their wealth and investment businesses. Not only because they are more lucrative, but because they are much less susceptible to competition. Most of the competitive disruption in banking is happening on the client-facing side – new user interfaces, personalization, big data, biometrics, buy now pay later. These features all improve the user’s experience, and naturally, there will be more users to impact on the retail side.
This may be countered by the fact that zero-commission trading and robo-advice are now widespread on the wealth side. However, these innovations target that same retail banking audience, who are getting into investing for the first time. As great as it is to take on these new customers, the big banks are still focusing on their bread-and-butter high net worth (HNW) clients who drive their business. At the top end of the wealth management sector, the innovations are usually back-end rather than customer-facing such as AI and big data being used to target specific investment opportunities or natural language processing (NLP) analysing company documents and data to help investment recommendations. Having said this, big firms are aiming to make their wealth interfaces more accessible and user friendly. Swiss fund manager, Vontobel, has built an app for clients to manage and review their portfolios and this is a trend in the industry. Large funds are aware that will need to continue to innovate to maintain their position in the market.
However, relationships matter. HNW clients are less likely to drop their prestigious wealth manager for a disruptive start up with no track record. This means that big banks can be more comfortable knowing their wealth business are more secure than the retail side, and therefore they are happy to get out of the retail dog-fight to focus on an area where they arguable have more oligopolistic power.