Digital Banking: Be Ready or Be Disrupted
Background
It’s already happened in sectors such as retail and travel, but for banking the digital revolution has so far been reasonably business friendly. For an industry that often likes to stick rigidly to its operational traditions, often driven by the abundance of legacy technology, the prospect of being disrupted by the next big technological innovation is akin to having someone run in and steal all the money.
The problem is that millennials are growing up and they want more. They are used to dealing with technology and having the choice that it provides. Unless retail banking can keep up with the times, there may be tough times ahead for those who bury their head in the sand and continue to operate as usual.
Ok, so lets start with my regular health warning here… These are my opinions and observations. They are based on the work I perform at board level with many leading, large listed businesses seeking to get the most from their disruptive initiatives. Please feel free to chime in with your own in the comments below but please also note the intention of this article is to provide a little strategy guidance and observation. For those looking for more technical detail please feel free to follow my update feed as I frequently cover subjects such as Blockchain, Fintech, Insight and Analytics and Big Data.
What is Disruption?
Disruption occurs when any innovation takes hold in the market and changes it for good. An obvious example I have covered before is the move from CDs to downloaded MP3s that took music away from the high street retailers and delivered it straight to our devices. Going back further, the invention of the motor car was seen as a disruptive event. Our access to smart devices that allow us to connect while on the move can also be seen as a disruptive influence on a number of industries. When this disruption is useful, affordable and desirable to the consumer then things have to change. In the banking world, most of this change has been relatively easy to manage to date but there could be a seismic shift in the next few years as digital technology develops and new opportunities come online.
How Disruption Will Effect Banks
Banks have had a taste of disruption through modern new entrants to the market (and not just those backed by the Supermarkets). However, many in the industry see it as inevitable that significant changes will take place in the next five to ten years. This will be driven by the needs of the customers and those new ‘kids’ on the block who dictate the pace and demand for digital offerings, greater choice and change. It will naturally include more competition but also the ability of customers to opt for boutique style services where they can choose the latest offers from a range of companies.
At the moment, the changes that this disruption will cause are difficult to fully visualise. It could be, for instance, that we will see a number of speciality banks combined with those who broker deals and offer a range of services to customers. Some banks may even begin to compete beyond financial services. With the breadth of online and smart payment services available nowadays, some of it being driven by China and Asia, others like Apple will no doubt attempt to get into the market.
Are Banks Being Complacent?
Banks have been slow or unwilling to move on occasion. This is something that often happens with long standing institutions that have never really been threatened before. As touched upon above, this may in part be driven by the huge investment in what is now legacy technology. Often difficult to integrate to the benefit or advantage of the customer, this may actually hinder digital adoption by the banks to the extent the customer actually wants. What disruption does is to provide the customer with real alternatives that, for them, work better than the current offerings. It also changes what the industry can or can’t do for their customers.
Whereas the disruption to the record industry was provided solely by technology, the disruption to banks will also be in the more flexible offer that is made to customers who want a better deal. It’s a change from providing a service that cannot be got anywhere else to one where customers are free to pick and choose depending on their requirements. This forces the banking industry to change and not be so parochial in what it offers.
Like all businesses, banks are nowhere if they are not attracting customers. Twenty years ago you were expecting to stay with your bank for a lifetime and it was damn difficult to switch. Now, more and more often, banks are starting to offer switching facilities, with fringe benefits, that means it’s easier and desirable to change. While the baby boomers may be reluctant, it’s a world that the millennials are more than used to.
Go where the best deal is, if it sucks, then you can always change.
Digital onboarding is key, providing all the experience a customer needs in one place and yet only 24% of banks have plans to do this for customers in the next couple of years. Less than 30% of banks have the infrastructure in place that support better analytics and synchronisation.
What Key Areas do Banks Need to be Good at?
As with everything else, one big issue is mobile. Being able to do things from your smart device such as a mobile phone or tablet while on the move is important. For banks this has been a massive problem because of the issues surrounding security and has taken a large amount of investment to get key infrastructure in place. There is also the need to support relationships with other suppliers such as PayPal and ApplePay that are becoming popular and integrating with foreign sources such as China who are often lauded as market drivers in this area.
So to digital banking initiatives… what can we expect?
The phone as a proxy for a payment card: Ok so not that new but adoption levels are rising as are retail outlets prepared to accept such devices. Some banks appeared to be early adaptors, but others actually backed out of the technology citing security issues. If customers want this, the banks will have to find ways of supporting it otherwise, new entrants may raid customers through better implemented solutions that deliver a platform for such payments based upon trust, privacy and security. Remember here that its not just retail customers. Businesses will also demand such platforms to enable them to attract customers who chose to use such payment methods.
Omnichannel banking: The sad but inevitable demise of the branch structure of traditional banks caused by changing customer habit and dynamics is prevalent. However, even our millennials and digital citizens live in the real, physical world and many surveys still indicate that branch proximity is a reason for considering switching banks. As we have seen in sectors such as retail, omnichannel is becoming increasingly important and as such enabling customers to do business on whatever mix of on and offline channels they choose is critical. How channels are integrated is becoming as important as the channels themselves. This has big implications for banks. A personal observation of mine is that the customer journey and the received customer experience are often fundamentally different, even within the same banks – it is almost as if the digital and bank branch experience is designed and built by different banks! In the future, digital will underpin how banks deliver outstanding customer experiences across all channels.
New offerings: Many now rely on third party offerings such as the money transfer services like, amongst others, Paypal, Western Union and Moneygram, to go about their everyday commerce. It is fair to say that we will probably see some push back from the banks as they start to realise this digital leakage can be plugged with similar bank owned or collaborative offerings. Think Barclay’s Pingit! Perhaps other offerings may deliver greater integration with other lifestyle support, based on using data as a method of understanding what customers really want, e.g. real-time short term insurance products based on location detected or enhanced reporting about P2P transactions and trends for your own spend patterns. How about gamified banking for the millennials that reward them based on goals driven by good personal financial management or even reward them for loyalty when using the banks own services rather than third party variants?
Fraud and ID theft detection: Already high on the agenda of many banks, how about them using the data they have or could have to enhance the full picture of the person they think they are dealing with and to use such analysis to enable earlier detection of suspect transactions. Perhaps even going as far as to allow authentication of transactions over a certain value on payment cards to be validated not just through chip and pin but biometrically via the thumb reader on your phone? Maybe not straight away but identity theft has grown as a result of ‘phishing’ attacks and many customers still attest to the difficulty of getting the bank to help them, post the event.
Insight and customer analytics: For a number of reasons this appears to be a low priority area for many banks. As such, many banks have not put enough effort into using analytics to enhance their own operations or the customer experience. The benefits should be obvious – leveraging analytics across the three key areas of customer retention, market share growth and increasing the banks share of wallet. Using such analytics deepens a banks ability to assess risks and set the right prices which are critical requirements in the retail banking market. Think here about the availability of more appropriate and personalised credit risk reporting, more intelligence based on employment, income and spend habits. By using advanced predictive analytics based on these such data, banks can significantly enhance their customer relationships and the likely lifetime value of a customer.
Digital as an enabler of financial advisory: With the rise in capable analytics and digital initiatives and an acceptance that machine learning and predicative insight will follow, it is clear that the banks can explore the prospects of providing greater support and relationship management through the digital channel than in traditional methods. Whilst many still regard personal bankers as important, will the digital version ever be regarded as a suitable proxy? The simple answer is, of course, maybe not today or even tomorrow but our millennials are keen advocates of the use of such support, guidance and advice being facilitated by sophisticated online offerings. Watch this space, a key area of disruption is likely to be in this realm of enhanced customer relationship management and intelligent personal finance advice.
Frankly, in this brief article, I can only touch upon the tip of the iceberg but hopefully a flavour is enough to kick-start the thought processes around the art of the possible.
So to the How… How to Disrupt the Banking Sector
Bringing disruption into the banking sector is not an easy task, even if it is inevitable. It requires a deep rethink of current strategies and provisions but much of the driving force may well come from outside the industry.
Ease of use is a driving force: Companies like Apple and Starbucks are setting themselves up as intermediaries, particularly for daily activities. This will drive banks into a secondary relationship, devaluing their importance to the customer. The digital marketplace continues to drive this with easy pay options. But remember, key here is real integration – unless it is integrated with a complete digital strategy, ease of use alone won’t do much to enhance your bank.
Don’t wait: Pace and speed to market will be a critical success factor for banks seeking to make the most of digital technologies. Innovation cycles have continued to accelerate. Start today and plan effectively.
Regulation as an enabler: Banks spending time exploring conduct risk and regulatory issues often make the mistake of implementing change and regulatory response based on meeting the requirements of those keeping a watchful eye on them. Often this is done at the expense of driving real coterminous business benefit from the initiatives. It is key that regulation must be managed and dealt with but using existing projects to explore digital enablement is a must.
Digital is a whole bank issue: Many are entrusting such ventures to their IT teams alone. This is never going to deliver the best benefits and the maximum return on investment. Technology is a powerful enabler, but only banks that embrace far-reaching strategic and cultural changes led from the top of the bank will successfully meet the digital challenge.
Greater competition: Now that there are new players in the market and substitutes to the old way of doing things, banks have to contend with losing market share unless they are able to compete on a level playing field. More than that, they will need to bring robust innovation, data and technologies into play to support new services and service levels to help fight the increased competition.
Changing attitudes: As consumers find new, more convenient and cheaper ways of paying, taking out loans and managing their money they will move away from the notion that the bank lies at the heart of all their financial arrangements. Consumers are already used to buying immediately with retail sites such as Amazon and expect the same kind of choice and responsiveness from banks.
Changing banking models: There’s no doubt that banks face major challenges in the next five to ten years. One of the big worries is that they are going to be caught out by the speed of change and organisations such as Deloitte believe that banks need to move quickly from the old model of clinically trying to optimise their balance sheet to a realistic longer term plan for a customer centric future.
Finally, waiting to be ‘first to be second’ will potentially allow new entrants and disruptors to steal a march on your venture. There are huge first-mover advantages for a bank that puts its digital strategy into play ahead of rivals. There’s no doubt that banking will face some major trials over the next few years and that disruption will bring change and innovation. It could be that, in ten years’ time, our banking system will be a lot different from the one we know today. But remember, banks that are forced to play catch-up risk falling farther and farther behind the frontrunners.