Secure messaging, loan book analysis and the end of high street banking are the trends to watch, writes Dawn Capital principal Mina Mutafchieva.
Banks are having to play a huge role in this new world. They will help us through the downturn, and get us out the other side.
But the last few weeks have seen changes usually reserved for periods of months or years compacted into days. So the banks themselves will need to learn to be agile. And software providers will play a big part in that. AI-based tools will deliver the productivity needed to handle the tsunami of customers seeking assistance.
To handle this workload, the bank employees, once safe working in fortresses, will now need that same security working from home. Banks and other financial institutions are having to make rapid adjustments to how they operate. Ultimately, this may lead to a redrawing of the finance landscape, with the tech-savvy neo banks better able to serve their customers in times of crisis and being rewarded in times of calm.
The broad principles remain: banks will still need software to run their operations; nobody is expecting huge churn on core infrastructure. For fintech companies, new sales will slow, but that means now is a good time to focus on existing customers, ensuring they are happy. It is an opportunity to bake a sense of “must-have” and urgency into product messaging, and make senior hires that can help tactically in the short-term, and strategically further out.
But the question all of us find ourselves asking is, where will the real value-generation happen in the near-term, and as we find a new normal?
Let’s start with this working-from-home paradigm. Secure communication tools, and using these at scale across an organisation, have now become a matter of life and death for banks. To date, the trade-off has been between security and productivity, and financial institutions have got along iteratively discovering how far they’re willing to go. But now, secure communication is top of the priority list: we are all at home, and we’re trying to continue to function.
Negligent businesses will turn a blind eye and kick the problem down the road. Secure messaging platforms like New Vector and Novastone run on protocols that enable organisations to hold their own data while communicating via an ultra-secure external tool. Businesses like this are already seeing enormous demand; expect products to become more sophisticated as financial services onboard faster and adapt more quickly.
The rapid adjustments on the operations side will go to the core of banking. In lending, the first order of business for banks and debt funds now is to understand and shore up their existing credit book. As soon as the coronavirus crisis hit, Silicon Valley Bank went out immediately and renegotiated customers’ debt on loans of $10m or less, pushing back principal repayments for six months. For those that need to act even more aggressively, companies like Eigen Technologies can do the same with even more complex instruments, using natural language processing tech to help banks review their exposures and covenant positions quickly and at scale.
There is enormous pressure for banks to keep lending and lots of government programmes to do this, but banks do still need to look very carefully at the risk profile of those they’re lending to. Businesses that support this decision making or can streamline the underwriting process will also do well.
Longer-term, B2B businesses with recurring revenues and a stable customer base will continue to benefit from easier access to funds, even in a recessionary environment.
These are exceptional times, however, and the lending landscape will continue to change. Negative interest rates will mean banks need new types of software to manage this shift.
And in this brave new world, we may see a new category of software developing – one that makes it easier for governmental organisations to distribute funds faster. Cash hand-outs, universal basic income are social security for entire nations. Mobile payments companies like Square in the US already have the capabilities to do this; let’s see what further innovation such times bring.
Meanwhile, companies that improve the finance function of firms have the opportunity to do extremely well as the world changes. And the above points to banks, and other large organisations, building out their software stacks faster than ever before – onboarding employees onto messaging apps, managing employee spend, using new tools to access and distribute capital, competing with non-banks offering banking services.
And the change to the banking experience for customers – the difference between the traditional incumbents and the digital-only players – has now been cemented. The era of the high street bank has well and truly come to an end. And this on/offline shift extends into payments: while those with an in-store presence have been hit hard, many e-commerce platforms remain largely undisrupted, with online spend increasing. And others are seeing activity from traditionally offline businesses – the pub that is now doing local delivery and vouchers online.
This period of uncertainty could catalyse a change that was already materialising: banks will find themselves increasingly competing with SaaS payment providers that, with customer money already on balance and data on those customers’ payment volumes, are becoming lenders. If these companies can hold onto their customers through Covid-19, doing their core capabilities really well, they stand a chance of offering other services where there will have been a shake-out. Watch for this with digital-only banking services.
The best friends of entrepreneurs are change and disruption. None of the startups that are huge success stories today would exist if things didn't change, and what we are seeing today are years, perhaps decades of change compressed in several short months. This is the stuff of history books, and it is a chance for the right entrepreneur and idea to make history.
Mina Mutafchieva is principal at Dawn Capital. The views and opinions expressed are not necessarily those of AltFi.