Tania Wadera, Schulich School Of Business
I am confident that my experience and the top tier education I’m gaining at the Schulich School
of Business will enable me to provide value to the role being offered through GMRP at CIBC. I
wish to showcase the interest I have in the sector of Banking due to the innovation that lies ahead
in this sector, and the various new business opportunities it presents.
In lieu of that, I am attaching below the economics paper I wrote as part of my course evaluation
to Prof. Fred Lazar (Grade Evaluation: A+) on why I believe the industry is to undergo a
revolutionary transformational change in the years to come.
FUTURE OF BANKS IS NOT BANKS
Banks provide credit or debit, digital services to access that money and not much else. Retail
banking’s core competitive advantages over new entrants are being eroded by technology and
regulation. A recent global survey of retail banking executives predicted that four of the top ten
banks will be displaced by digital disruption in the next three years.
Global mobile payments market is estimated to hit $3.4 trillion by 2022. What “ICE”
(Internet Changes Everything) did to the world two decades ago, Amazon is doing to the world
today. Well now it’s ACE, Amazon Changes Everything. The real threat, however, is posed not
by fintech erosion, but by waves of attacks on their business by global technology giants; unlimited
cash, great innovation, huge, loyal customer databases, and influential brands. That is far more
existential to the traditional banks than losing a small number of customers to fintechs. The threat
is not about GAFA (Google, Amazon, Facebook, Apple) taking market share, it’s that they become
the customer interface and the banks become the ingredient brand. A lost connection from the
customer renders them simple as a no-name product manufacturer. Without the power of the brand,
the only things they have left to compete on are price and features.
Cloud computing, customer-facing artificial intelligence and “big data” customer analytics
as three capabilities that are becoming critical to the competitive differentiation of financial
institutions. The more efficient processing of information, for example in credit decisions,
financial markets, and customer interaction, may contribute to a more efficient financial system.
Network effects and scalability of new technologies may in the future give rise to third-party
dependencies. Availability of computing power owing to faster processor speeds, lower hardware
costs, and better access to computing power via cloud services enable cheaper storage, parsing,
and analysis of data through the availability of targeted databases, software, and algorithms.
GAFA have far deeper experience in the abovementioned domains than their financial
services counterparts making scale effects difficult for financial institutions to catch up. As a result,
many banks and insurers are turning to technology firms to provide these core functions. Phone
payment systems are training their customers not to need bank cards i.e. Not to need banks. Having
embraced, (reluctantly or otherwise) Apple Pay and Android Pay may seem like a bank using the
latest tech to its advantage, but it’s also training their own customers to not use the most common
Economics Essay, Word Count: 1255
Tania Wadera, Schulich School Of Business
payment method apart from cash, i.e., bank cards. This is potentially removing the mental
association consumers currently have between buying things and their bank. If and when they
switch to a competing service that allows them to also pay using their phone, whether it’s a “bank”
or not won’t be important. Investing in tech isn’t enough. Banks are aware of the threats of other
digital players and have responded by investing wisely in digital services. All this though may not
be enough if those other players also do all of that, and can also offer a host of other services that
attract their customers and build better relationships with them. My main hypothesis is that it
doesn’t really matter how “digital” a bank goes, but that other companies that have better
relationships with the customers stand to take the business away.
Amazon-pay allows consumers to load cash into their Amazon account via physical
retailers. It’s aimed at consumers that don’t have bank cards and allows consumers to add cash to
Amazon account by handing cash over in retailer, which they can then spend online. But what if
Amazon also partner with retailers and allow consumers to use their Amazon (or similar) account
in store, and not just online? Allow consumers who actually do have bank cards /accounts to be
paid instead into their Amazon account — perhaps by offering no fees, or interest, or free services
like Prime? Then perhaps they mention that they also offer credit for small loans to buy higher
priced items in Walmart? There would be no bank involved in any of that process, just a tech giant
who already has a relationship with a consumer offering them some more services, on top of all
the other services they offer. Internet giants are disrupting the sector through services that take
consumers away from traditional banks.
Rapid growth of datasets for learning and prediction owing to increased digitisation and
the adoption of web-based services presents the opportunity to optimise processes on behalf of
clients; and creates interactions between systems and applying AI to enhance decision-making.
This could in turn lead to the emergence of new systemically important players that could fall
outside the regulatory perimeter. Examples would be Amazon Web Services (AWS), which
provides services to dozens of finance companies, including Aon, Capital One, Carlyle, Nasdaq,
Pacific Life and Stripe or Brazil’s Banco Bradesco Facebook app, which allows customers to
conduct day-to-day banking from Facebook, relying on the social network’s customer data
analytics to target users.
GAFA, Alibaba, Paypal are “reshaping one industry after another, blurring sector
boundaries as they seek to be all things to all people,”, as quoted in a Mckinsey report because
they have more cash and less regulation. They set the standard for a platform economy, now banks
too must adapt their approach in order to keep up with their customers’ expectations. They will
increasingly be in the business of selling banking products, apps and services to consumers in an
effort to maintain acquisition traction. And they’re going to be looking at owning more and more
of the payment process (before, during and after a transaction) because of the opportunity for highfrequency, low-margin revenue and the ability to capture purchase behavior insight.”
With Amazon exploring the potential behind checking accounts it’s not too far a stretch to imagine
how customers could use one of the tech giants as their interface to the wider world. Banks need
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Tania Wadera, Schulich School Of Business
to be alert to the risk of losing the direct relationship with the customer and becoming a commodity
service provider behind the scenes.
Amazon is aggressively pursuing partnerships with JP Morgan, Capital One, etc. By
partnering with a large-tier bank, Amazon can skip the step of applying for a bank charter and
offer banking type products and services without the hassle of dealing with the level of regulations
and scrutiny that banks face. It could also save the cost and effort of building banking applications
from scratch, allowing it to launch and scale into a targeted audience more quickly and with less
friction. Partnering gets Amazon there faster and with more ease. Being a traditional, regulated
bank requires idling huge amounts of capital as a buffer against risk. By not having a charter,
Amazon is free to use that capital to fuel additional growth. Whether or not technology companies
do end up transforming into a bank, they will certainly occupy more of traditional financial
institutions’ territory. They are already urging regulators to create a requirement for banks to open
up access to their financial data through an Application Programming Interface. This would
essentially make the connection to bank transactions instantaneous, allowing technology
companies to capture more of the consumer-facing business. If that principle goes into effect, it
will be much less necessary for them to have a bank charter because they will be able to be the
front end for consumers, and essentially force the banks into more of a public utility role.
Its crucial to gain the vision, innovation, spirit, and technologies to greenfield a formidable
response. Banks need the Fin-techs, and they need them now.
Economics Essay, Word Count: 1255