Can banks avoid becoming the telecom companies of this generation?
Telecom companies have lost their luster in recent years — here's how it happened, and why banks could be subject to a similar fate
More than 20 years ago, President Clinton signed the Telecommunications Act of 1996, removing the barriers to entry in the telecoms industry and opening the markets up to competition. Telecoms soon became an exciting place to be. The industry had enjoyed huge growth since the early days of the telephone, and mobile and internet expansion across the world promised to be yet another exciting new chapter for telcos. What these companies didn’t know, however, was how the rise of the internet would pull the rug right out from under them, opening them up to a whole new class of competitors that were distinctly not telecoms companies.
Before the internet, telecoms companies owned the entire communications value chain by providing consumers with connections to the rest of the world—be it landline, car phone, or early mobile device. Aside from the device manufacturer, telecoms players owned the customer relationship from end-to-end, and were able to monetize on exactly what services a given consumer used. With the rise of SMS, telecoms companies restructured their plans to capitalize on the trend that SMS was increasingly replacing voice, and consumers who wanted access to these services had no other option but to pay their carrier accordingly.
Enter the internet
In-home and office internet connectivity became a huge opportunity for telcos throughout the 1990’s, with internet connectivity reaching 41.5% of U.S. households and 51% of homes having a computer by August of 2000. Telcos invested heavily in the infrastructure necessary to provide faster, wider coverage, and broadband started to replace dial-up in the early 2000s. These investments continue today with the rise of fiber internet. Wired connectivity was and continues to be an important and stable part of telecoms’ revenue—but there is more to the story.
The first “smartphone” was released in 1992, but it wasn’t until 1995 that the term became recognized. In fact, more than a decade passed until the release of Apple’s first iPhone. At first, the smartphone looked like a major opportunity for the telecoms industry, as the rise in demand meant that companies could start charging for not only voice and SMS, but also data.
But telecoms didn’t move fast enough. With the rapid adoption of smartphones came a rise in OTT, or “over the top” apps. OTT apps like Skype and WhatsApp allow users to communicate over a data connection, without needing to pay voice or SMS fees to their carrier. Between intense industry competition and consumer expectations of reliable, cheap data, telecoms companies struggled to increase data prices. At the same time, they were seeing declining voice and SMS revenues as consumers replaced these services with calls and messages via data-powered OTT apps.
In a matter of years, telcos went from being the sole providers of communications services to the plumbing that facilitated connections between third-party apps—all but losing the exclusive relationship they had previously held with their customers. Before they realized what was happening, telcos’ biggest competition became OTT apps, and focusing internally on price wars meant the industry lost its opportunity to evolve along with technology and consumer demands.
A rock in a hard place
Perhaps worse than the prospect of short-term declines in revenue was the fact that telecoms had boxed themselves in with few options to reclaim the high profits previously enjoyed in a pre-smartphone world.
One option would have been to completely block OTT players from the network. While a world today without WhatsApp may be unfathomable, it was a valid consideration as these apps were still gaining traction. This strategy, however, would likely have led to high rates of churn, with customers simply turning to a different provider who did allow access to their apps of choice. Another option would have been to adjust fees to disincentivize OTT use, along with charging OTT players for access to the network—but again posed the risk of customer loss to competitors.
A third option, and the one taken by many of the more successful telecoms, was to completely restructure the pricing model to adjust for usage patterns. Verizon did this in 2012, paving the way for providers in both the U.S. and abroad to start charging primarily for data and throwing in voice and SMS on the side.
But restructured pricing didn’t solve all of the industry’s ailments. Fast forward to present day—and while telcos certainly aren’t dying, they are not the shiny unicorns of years past. SMS messaging started falling globally as soon as OTT took off. Many telcos have tried their hand (and mostly failed) at proprietary OTT apps to recapture the consumer. Margins are being increasingly squeezed as demand for mobile connectivity increases the need to capital expenditure and increased competition drives prices downward. OTT apps are here to stay, and telecoms have little choice but to assume their new role as the industry's plumbing.
Parallels in banking
If banks aren’t careful, data could become what the smartphone revolution was to telcos.
Banks have long owned the consumer relationship end-to-end, providing financial products across a range of needs and benefitting from the ability to cross-sell more profitable products (like loans) with stickier ones (such as checking accounts). Even innovations like peer-to-peer lending, which started out by tackling the banks head on, are now looking a lot more like traditional institutions. Today, we’re still in a world where financial products are largely provided by retail banks—in telecoms terms, we’re in the 1990s with landlines and dial-up internet.
But data holds the potential of changing that. While banks have long held privileged and exclusive access to consumer financial data, technology and regulations are changing that and opening banks up to a new and very different-looking set of competition. With consumer financial data made available (on a permissioned basis) to third parties, these players are able to build apps on top of bank accounts—and even to begin offering traditional financial products that have been repackaged to attract a new generation. If things end up as they did for telcos, we might see a future in which banks act as mere storage boxes for consumers deposits, facilitating the data and capital flow between OTT-like financial apps, but failing to attract consumers to the high-margin products that have historically driven consumer banking revenues.
Luckily, a number of lessons from the telecoms industry can be applied in banking—and some players have already started doing so. One critical failure point for telcos was a lack of coordination and partnership between traditional players who were focused on competition amongst themselves, and consequently overlooked the bigger threat of OTT apps. Peer-to-peer payments is an interesting example of how banks have (uncharacteristically) come together to challenge new solutions. In 2017, 30 U.S. banks launched Zelle, which rivaled Venmo in terms of volume in less than one year from launch. For comparison, it took Venmo nearly 10 years to build that amount of volume, highlighting the huge potential for banks to work collaboratively in order to solidify their hold on the market.
A reevaluation of fees and revenue model is also in order. Consumers are increasingly aware of sneaky practices, such as ATM and overdraft fees. And while these revenue streams might not yet have gone out the door, banks would be wise to reconsider their sustainability. In addition, as upstart players introduce similar products to the market, banks must ensure their products are priced competitively—both compared to other banks and to newer players.
In 2018, it remains to be seen whether banks can adapt to and adopt the technologies that will drive consumer finance forward. As with telcos, the banks aren’t going anywhere—so the question is rather whether they’ll be able to maintain their current business model, or fade into the background as new providers take over the consumer relationship (and the margin that goes with it).
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