The Modular Bank of the Future

The last decade has been a rough ride for the banking industry and financial technology challengers didn’t make it any easier. In response to the changing environment, financial institutions came up with their own ways of adaptation – some through collaboration, others through internal transformation, etc. In any scenario, banking will never be the same; it is no longer a service, it is an experience. Moreover, banks no longer own the customer, and one can pick and choose the experience he wants to have.

The future of banking industry is veiled yet and professionals may sometimes find themselves is disarray of opinions regarding the next big thing in banking. While some heavily rely on mobile, others dive into an exploration of the ways distributed ledgers can aid in building the financial services of the future. The majority, however, seems to be aligned in anticipation of big changes to come in the next decade or less.

There are questions we have also been looking to find answers for. Like, what would the bank of the future look like? How would it function? What technology would be powering the next generation of successful banks and how will current banks transform? There are many questions, but let’s speculate on the idea we touched upon before – a modular idea of a bank.

The modular bank of the future will have only one thing left from the legacy – bank account. It will be a platform that connects alternative providers in a massive network, out of which each customer can pick and choose the vendor for a particular need and shuffle them as he pleases. All that comes with a bank-grade security and compliance, expertise and (maybe) centralized customer service.

In 2016, when there is a FinTech startup for almost any bank service that can perform the same service at a fraction of a cost due to advanced technology, it makes natural business sense to optimize banking processes and leverage the opportunity.

The process has already started and there are banks realizing the necessity to outsourcing heavy-duty services to tech-powered agile competitors instead of trying to kill a fly with a hammer. One of the examples is Bank of America that at the end of last year announced the collaboration with Viewpost to solve the cash flow problems of small businesses. Under the hood, it's essentially a path to outsource the SME lending business to get all the benefits without an additional headache.

JP Morgan Chase and OnDeck is another example of a smooth ride to a loan mine for an institutional player. According to the WSJ, JPMorgan Chase spent about $8 billion in 2015 on technology. But when it came to developing a new online loan for small business, the bank turned to an unlikely outsider. This year, JPMorgan will start using OnDeck to help originate loans for part of the bank’s four million small-business customers. On Deck Capital, which has extended as much credit in its eight-year history as JPMorgan does in a few months, will help the bank process applications more inexpensively and quickly, in hours instead of weeks.

Alternative lending is one of the hottest FinTech segments and intuitively is one of the first links to be replaced in the bank as a ‘warehouse’. In fact, financial institutions have already been exploiting the model by financing loans originated by sneaky rivals. Some estimations suggest that in the US, around 80–90% of the capital lent through the two largest P2P lenders – Prosper and Lending Club (before it got into trouble) – is institutional money. It means when a lender originates a loan on a platform (even P2P platform), it is most likely secured by an institutional player.

The bottom line is that the bank of the future may be a modular construction housing array of FinTech startups each servicing a particular need. Fortunately, there won’t be a lack of choice in of the bricks that will constitute the foundation.