This article originally appeared in Gulf News.
When Bain & Company surveyed 83,000 customers in 22 countries recently, we found that more than one-third of them bought a banking product from their primary bank’s competitors during the past year. The rate of defection reached an average of 28 per cent in developed countries and 47 per cent in developing countries.
If that many bank customers were closing their current accounts each year — completely defecting — bankers would be up in arms. Yet the hidden defection, often involving more lucrative products, goes largely unnoticed by banks because they seldom know their customers were shopping in the first place or that they lost the business.
This trend is accelerating as digital start-ups and specialist firms, less encumbered by creaky old IT systems and a thicket of banking regulations, offer better, simpler solutions and make it easy for people to find them. Strong demand for peer-to-peer lender Lending Club’s recent initial public stock offering is just the latest sign of investors’ and customers’ confidence in alternative business models.
Meanwhile, banks’ classic advantages — personal relationships between bank managers and customers, big branch network and a reputation for security — have been crumbling. Even regulation in some countries, such as the UK, has grown more accommodating, as regulators who once frowned on new business models now want to promote competition.
As a result, bank revenues and profit margins look more and more vulnerable. In Germany, France and Italy, for example, Bain estimates that at least 30 per cent of retail bank revenues are at risk of migrating or disappearing by 2020.
When Bain & Company surveyed UAE bank customers in 2013, 40 per cent out of about 2,500 respondents said that online and mobile banking would become their preferred way to bank. This does not come as a surprise, as UAE residents lead the Menap region (Middle East, North Africa, & Pakistan) in smart phone penetration rates. Among UAE mobile owners, 78 per cent have smart phones, according to Nielsen. Many UAE banks are taking advantage of this fact by creating leading-edge mobile banking applications to attract and retain customers. In the iTunes UAE App Store, seven of the ten most popular finance applications are related to mobile banking, with ENBD, ADIB, and ADCB on top.