We present certain parts from the article by co-founder and managing partner of Digital Horizon Alan Vaksman, which was recently published in “Vedomosti”.

Traditional banks find it difficult to admit that they hold a small place in the lives of their clients. People do not like banks; they like to buy goods and services. Some people enjoy saving money, but most need financial security. The Central Bank of Russia is adding fuel to the fire: introduction of the digital ruble will further reduce the need for the services of commercial banks.

Digital currency will be kept on Central Bank accounts, and clients will be able to access it and make settlements through electronic wallets that can be opened not only by banks, but also by financial intermediaries. The idea of a customer-oriented bank is fading away, and as painful as it may be, financial institutions need to rethink the concept of development for their business.

Banks themselves are not a requirement

It is as simple as this: no customer loves their bank. Yes, strong brands gave their ups when customers like a banking product, but the feeling disappears rather quickly. The easiest example is credit cards. For a long time, the industry believed credit cards provided banks with a high level of customer loyalty, because people used them often and it was the only viable alternative to cash. Today, we see how the COVID-19 pandemic has accelerated the development of contactless payment. Now everyone pays via smartphones and it does not matter if the payment is made with a bank card, an installment plan service, Apple, Amazon, PayPal, or any other payment provider. The main point is that the payment for the desired product is quick and effortless. And there are many possibilities for that.

To buy a product or service nowadays, you do not need to use banking services directly. The payment process, including with the use of credit funds, can be integrated into any other product - from a marketplace to a computer game. That is how high-tech services push aside banks that remain behind the scenes and not interact with the user directly

Many banks will struggle to accept that they are cut off from consumers. After all, so much effort, money and time go into gaining customer loyalty! However, orientation toward customer is not written in the DNA of regulated financial institutions. A bank, first of all, must be safe, reliable and transparent. The reality is that customer service has always come second for regulated financial institutions.

Banking as a service

Banks find themselves at a junction: either you build an ecosystem where financial instruments are just an auxiliary tool for your other tech businesses, or you lose your audience. Even the mobile banking boom has not stopped the outflow of customers: users pay where they shop, and they open the banking application mainly to check balances or transfer funds from one account to another. And over time, separate proposals for these actions will not be needed either.

The most successful fintech companies understand the importance of the new financial paradigm: if you place a financial instrument in the right place and offer it at the right moment, when the user really needs it, the conversion increases many times over. No wonder Swedish fintech Klarna is considered the largest European fintech.

The need for banks is called into question even regarding the only function where they still play the main role - keeping money in deposits. However, this role too is gradually moving to applications for personal finance management, where data from different service providers is collected in one place - from insurance to an investment account.

Searching for transactions

To maintain their position, financial institutions will have to look for new points of contact with customers through products and services, into which they can integrate their traditional core functionality - payments and loans. It can be marketplace, aggregator, accounting program, business scheduler, game, streaming service - any digital space, where users are concentrated and where they consume products or services. This option allows banks to simultaneously service millions of transactions and reduce the cost of attracting customers and maintaining retail infrastructure.

We at Digital Horizon are not alone in the opinion that banks will have to abandon direct contact with the audience: many experts call it Embedded Finance, i.e. the ability to embed financial transactions into non-financial products. It is the main trend that will shape the future of the financial industry in the next ten years. The synergy of fintech and corporate IT solutions opens up new vertical markets, which are centered on specific industries, and facilitates increase of profit. According to Lightyear Capital’s estimate, profits in the embedded finance segment will grow more than 10 times by 2025 - up to USD 230 billion, and experts from Bain Capital Ventures believe that the volume of the segment will amount to USD 3.6 trillion by 2030.
Subscription-based banks

The bank of the future is software that will be bought by non-financial services, for example, the aggregators of taxis, food delivery, and online stores. Banks will similarly offer membership in their infrastructure for a fee - perhaps in the form of a B2B subscription.

At the surface, it may seem that the lack of direct contact between clients and banks will lead to negative consequences for the latter. However, financial institutions seeking an embedded future will actually benefit and generate more value for their shareholders without spending huge amounts of money on marketing and maintenance of high-level customer service. The banks that decide to continue the struggle for consumer love for a loan or a deposit are likely to find themselves in a scorched land.

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