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Banking fightback?

Banks can ensure their relevance by creating a federated bank ID that serves as a ‘digital passport’ throughout the economy, says article co-authored by Professor Stelios Kavadias of Cambridge Judge Business School. 

Upward view of a bank building made of glass windows.

Banks are now deeply threatened by tech platforms but can ensure their relevance by creating a federated bank ID accepted as a ‘digital passport’ throughout the digital economy, says an article co-authored by Professor Stelios Kavadias of Cambridge Judge Business School in Strategy+business, a magazine published by member firms of the PwC network. 

Platforms and services including Apple Pay, Google Pay and WeChat Pay in China have grown rapidly as customers increasingly make choices based on “transaction execution” rather than traditional banking relationships, but banks retain a ‘unique’ advantage when it comes to public confidence, says the article. 

Professor Stylianos Kavadias

“Although consumers might not typically like the banking sector, they do generally trust it to manage their data in a safe and responsible way (increasingly a key differentiator from big tech firms),” the authors say. “Banks are uniquely positioned to embed themselves as an essential feature of the digital economy. They can become custodians of identity and consent — and, ultimately, of trust.”

The article – entitled “The shifting nexus of retail banking” – is co-authored by Rowan Laurence, an MBA graduate of Cambridge Judge Business School (MBA 2016) who is now London-basd financial-services industry specialist with Strategy&, PwC’s strategy consulting business, and by Stelios Kavadias, Margaret Thatcher Professor of Enterprise Studies in Innovation and Growth at Cambridge Judge Business School and Co-Director of the School’s Entrepreneurship Centre. 

Stelios says the article stemmed from a conversation he and Rowan had while the latter was a student at Cambridge Judge, in which they discussed how the wave of transformation across industries seemed to be affecting financial services in general. Stelios had been sharing with the MBA class his research on six degrees of transformative innovation across industries, and Rowan picked up on it and questioned what such transformation meant for the financial services industry. 

Currently, as the economy shifts further toward digital platforms, most developed countries have “no agreed-upon standard for digital identity”, the article says. So, there is a plethora of unique identification systems, including cumbersome two-stage authorisation procedures, resulting in “disconnected journeys that users must endure just to get credentialed.”

In the future, both customers and platform providers will instead “demand that verification and consent processes be instant, integrated, and frictionless”, and this can only happen through a “universally recognised and accepted form of digital identification.”

The rise of online payment platforms has eroded banks’ traditional ties with customers, threatening not only revenue streams associated with consumer banking but also lending, foreign exchange, and cash handling fees. A new bank ID system, the authors say, would counter this threat by effectively tying digital identity to a bank account. 

“When a bank account effectively doubles as a digital passport, the cost to consumers of abandoning the traditional banking system for a tech-led alternative will increase immeasurably,” the article says. 

A national example of the sort suggested by the authors is BankID in Sweden, launched in 2003 by a consortium of Swedish banks and now adopted by more than 99 per cent of the country’s working-age population while reducing banks’ compliance costs. 

“Banks have a small window of opportunity,” the authors conclude. “As the nexus of the consumer banking relationship continues its migration away from the traditional stores of value and toward the platforms where transactions are executed, federated digital identity could be a decisive factor in banks’ continuing fight for relevance — and indeed in their survival.”