Chairman of the Management Board of AS Expobank Rolands Legzdiņš
According to data of the Finance Latvia Association, banking capital is continuously growing and has reached the highest value since 2018. At the same time, the number of banks in Latvia has decreased in the recent years. At present, 13 banks are operating in Latvia, yet this number will go down in future, as a number of banks will either merge or undergo reorganisation. This is natural, since the domestic market is small and divided. A similar trend is in the European Union overall, with the number of banks having decreased after the financial crisis of 2008. In turn, after 2018, the number of banks has dropped from 6088 to 6008.
In the last 30 years, the banking sector in Latvia has experienced substantial changes – financial institutions are starting to engage in educating the society more and more, services are becoming more easily accessible, and an increasing number of banks are moving over to e-environment. A range of services can now be received without paying a visit to the bank. This tendency will only grow in the future. Understanding of banks as financial institutions will also change with time, transforming from tangible premises to virtual world where all the services will be rendered to us in virtual shape, and the level of safety will be as high. There are banks that are changing their names today so as to not include the word “bank”, because the youngest generations of customers often feel intimidated by this word, making them think that it is completely old-school, complicated and incomprehensible.
One of the aspects contributing to changes is customers. Firstly, customers are becoming more knowledgeable and educated in financial literacy matters from year to year, as well as their digital skills are improving. When it comes to lending, there is a difference as to how experienced the entrepreneur-customer is. Banks must learn all the time – generations of entrepreneurs are changing and we must be able to speak one language with each generation. Entrepreneurs who have worked for 90 years have a different way of reasoning and understanding of risks compared to the ones working currently. If banks were used to working with producing companies for a long time, then now they face more and more situations when the customer renders services in the e-environment. That also changes their understanding and necessity for banking services. The new generation of entrepreneurs means both challenges and opportunities at the same time.
Banks will change – both their form and content will transform. While currently there are banks that specialise in one specific type of services, the expected future perspective is that the range of services offered by each bank will expand. Similar to supermarkets, banks will be providing all the necessary services – payments, deposit of funds, loans, and brokerage services. Furthermore, a help desk employee of the bank (artificial intelligence in the visual form of a human) will answer questions of customers in video format in a second and will coordinate them at moments when they have gotten lost. To ensure a broader range of products and lower costs, banks will team up or outsource services of more successful FinTech companies, creating joint ventures. Instead of creating new services, banks will mostly combine the already existing services and infrastructure. At present, the biggest challenge banks are facing is their existing heritage of systems, which are comparatively more difficult to combine with modern technologies. Banks have data – customer base, while FinTech have technologies but do not have customers. There must be two components for a reaction to transpire – one will not do.
It must be taken into account that banks currently have to work with both the generation of customers who rely on their bank’s branches to manage their finances and want to come to the bank to meet their consultant face to face, and customers who are used to do everything remotely – on their smart phone. However, in terms of expanding the range of services, further digitalisation will be inevitable in the future. As a result, banks will dedicate an increasing part of their capital to finance improvements in user experience and online safety.
Due to the impact of digitalisation, more and more banking services will be available remotely. As this tendency grows, we will end up in a situation where the bank will not exist as a physical institution in the future. The infrastructure that we have gotten used to for hundreds of years will be gone. I believe that the banks of the future will operate in the virtual environment. Considering the development of blockchain technologies, finances will become decentralised worldwide, meaning that we will start using automation (technologies) instead of banks as middlemen. That will trigger completely new types of financial markets, goods and services to emerge. We are moving towards this now already. A large proportion of people representing generation Z already associate the bank with a smart phone application. It is the generation that has grown up completely in the digital world and uses a smart phone or a tablet to manage almost every aspect of their life. This has an effect on their loyalty towards brands – consumers find it much easier to change service providers or to make use of supply from several companies, for example, taking a loan in one bank and opening a time deposit in another one.
If virtual banks are perceived as science fiction by a part of the society, we should remember that every novelty in the financial sector was once perceived as something impossible. Many remember the time when first ATMs and payment cards appeared in Latvia. The first ATM in the world came about in the late 1960s, and looking at it with today’s eyes, we understand that these were actually the first FinTech solutions in Latvia. While we were sceptical towards them, did not trust and saw them as safety risks, today they are a part of our everyday life.
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