Three Disruptive Forces Shaping the Future of Banking

Originally published on May 26, 2015 on Credit Union Magazine

Financial institutions are facing pressure from all angles to adapt their business models.

Three forces are shaping the future of banking: Technology innovation, demographics, and the emergence of new business models.

For most traditional financial institutions, technology innovation is a weakness. Instead of innovating, many credit unions and banks rely on third-party firms—from established core providers to startups—to provide them with a mix of products they can repackage and resell to their members and customers.

True innovation—the kind that challenges existing business models and creates new sources of value—for the most part is not happening in financial institutions.

Instead, nontraditional financial services firms—including technology, retail, and telecom sectors—are driving innovation with the potential to disrupt the banking industry and challenge the dominance of traditional financial institutions.

Demographics is the second force. Millennials now account for 25% of the U.S. population, now totaling 80 million and growing, according to the U.S. Chamber of Commerce. In five years, they will outspend baby boomers.

As a product of the Great Recession, they save more of their income and have deferred substantial purchases such as cars and houses longer than older generations.

Millennials are no longer just consumers; they are producers. Facebook founder Mark Zuckerberg, for instance, was born in 1984 and is the archetypal millennial.

If financial institutions can’t find a way to appeal to millennials, others will.

The third force is the emergence of new business models. These models are driven by both millennial demand and communication preferences, as well as by new technologies.

The combination of these three forces represents an existential threat to traditional financial institutions.

The banking industry has already survived two major technology shifts in the past 20 years:

1. The Internet came first in the mid-1990s. The first online banking website actually was launched by Stanford Federal Credit Union, Palo Alto, Calif., in 1995.

2. The second shift happened in 2007, with the release of the iPhone. The smartphone category had been around for years before the iPhone.

But, even in the case of BlackBerry, smartphones before the iPhone didn’t represent a huge leap in technology impacting the mass market. They were niche products for niche markets.

The combination of the iPhone with the iTunes platform enabled an infinite number of apps as custom options for virtually any potential user.

The shifts caused by the Internet and the iPhone could have easily created a wave of disruption and a failure to adapt to new business models, and that did happen for many industries. The banking industry, however, appropriately and successfully responded to these shifts.

The industry adapted to both of these shifts and exploited them as a new means of delivering existing services to their customers. The competitive landscape in this industry has remained relatively unchanged and disruption was avoided.

Even though financial institutions have survived these shifts driven by technological innovation, the market dominance that banks have enjoyed is now at risk. But, unlike the Internet and the smartphone, the catalyst for this risk is not a technology disruption.

Technology is a key factor, but it isn’t the only factor. Financial institutions are facing pressure from all angles to adapt their business models, services, and culture to respond to the changing consumer preferences of millennials.

Millennials are simultaneously the drivers and consumers of the innovation that poses a threat to banks and credit unions.

The birth of the iPhone in 2007 has spawned dual revolutions in social media and communication, and it has enabled the creation of entire industries of emerging technology.

Traditional financial institutions are suddenly in-play with retail, technology, and telecom firms all tiptoeing at the edge of banking. Nontraditional financial services firms have developed deep capabilities to deliver superior user experiences and they’re using that as a springboard to encroach upon the existing status quo.

Rather than continuing to pursue a “wait-and-see” strategy that merely keeps up with the innovation driven by nontraditional firms, banks and credit unions need to refashion their internal culture to embrace innovation and become the first-movers in delivering new service offerings.

Otherwise, the disruption of their traditional business models will continue and banks and credit unions will lose the fight for millennials, and with them an entire generation of future growth.