Danny Bradbury has been a technology journalist since 1989. He has written for clients including the Guardian, the Financial Times, the National Post, the Economist Intelligence Unit and the Independent.
He writes regularly on technology issues ranging from cybersecurity to enterprise IT, and is also a documentary film maker.
Banks must change with the times, or risk being disrupted.
Danny Bradbury explains how to meet the challenge.
Technology has a habit of disrupting every industry it touches. Given the financial sector’s heavy reliance on information processing, it was only a matter of time before tech changed the face of this industry, too. Financial technology (fintech) is creating a new class of financial services companies which are challenging old models. Conventional banks are faced with a choice: transform, or become less relevant to customers.
For decades, the banking community has been dominated by large, traditional companies, protected by regulation and with entrenched values. They were no strangers to innovation, being responsible for significant new financial products and services ranging from ATMs to straight-through processing. Nevertheless, the innovations were driven mostly by their own needs, and happened at their own pace. That’s all changing now.
Innovative competitors are forcing these banks to move more quickly, reinventing themselves as fast-moving, customer-centric companies with products and services that go with the customer wherever they travel. The challenge extends beyond dedicated fintech innovators to tech companies like Apple and Google, who are encroaching on banks’ core services with new payment technologies.
Trends like these have led 81% of global banking CEOs to see the pace of technological change as a threat to growth, according to PwC, who also said that 56% of them saw fintech entrants as a tangible threat.
Many incumbent banks are seeing the challenge as an opportunity to adapt their cultures and adopt new ways of thinking. Santander launched a $100 m fund in July 2014 to explore new opportunities in fintech. BBVA spun out its own venture fund into a $250 m investment with Propel Venture Partners to invest in new technology opportunities. Barclays has been building a string of fintech hubs called ‘Rise’, including one opened in Mumbai this March. The smart money in the established banking community understands the value of technology.
Traditional banks can use technology tools to improve their customer experience, which is a key goal of the innovation process. At its core, this means getting customers the product or service they need for their particular lifestyle, when they want it. In its 2016 report on innovations in banking, Accenture highlights customer service is one of the biggest deliverables for next-generation banks. This sees financial services firms building on a strong foundation of optimized contact centers, basic multi-channel integration and need-based custom offerings, through to more sophisticated models. These include ‘intelligent multi-channel’ architectures that do more than simply broadening the scope of customer interactions. They will also deepen the quality of those interactions by focusing on real-time analytics and event management to give banks a clearer picture of their customers. These will enable them to reach out and interact with customers instantly at the right moment via the appropriate channel.
This enhanced customer experience also involves engaging customers where they are most comfortable, typically on social media rather than in branches they may visit less frequently.
For any of this to happen, though, back-end systems must be agile and flexible enough to support it. Data silos have no place in this new architecture, because banks must have a single view of the customer across all departments and functions.
Modernized banking systems will also be the foundation for faster, more sophisticated product and service creation. Banks must adapt technology architectures to support more flexible software development processes, uncoupling the back-office technical layer from the business product layer.
Separating the two will enable business teams to quickly translate customer needs into new products and services. They will be able to do so without going back to the IT department for every single change.
Traditionally, banks can take multiple quarters to complete a product development. By this point the market may well have changed, and customer needs may have evolved. Designing banking systems in this way will enable product teams to become more agile, speeding up development times and giving business teams more involvement in guiding product and service design.
Revitalising service development and delivery is a key business goal for global banks. A retail banking study conducted by A.T Kearney and non-profit banking association EFMA revealed that more than 95% of banks were focusing on increasing their value-added services. These services will typically be richer in content, and more tailored to individuals. This brings us to one of the other key pillars of innovation that incumbent banks should be embracing: dynamic segmentation.
By adopting a digital strategy, established incumbent banks can supercharge their segmentation strategies, leading to a dramatic improvement in conversion rates from customer interactions.
Traditionally, banks have segmented customers on a reactive basis, using a handful of relatively static parameters such as income, employer and age. They change customer segmentation infrequently, only when these parameters alter.
Conversely, innovators use data from frequent interactions across multiple digital channels to build up a more sophisticated and fluid understanding of the customer, typically based on many more parameters than traditional banks. This makes them more responsive and dynamic in their customer segmentation, leading to micro-segmentation opportunities that change according to a customer’s daily activity.
Analyzing customer data in this way enable them to offer customers products and services based on their current situation. A bank might be able to tell when a mobile customer is near one of its retail partners’ stores and offer them a discount for buying a particular product with their credit card.
As relationships with customers become more dynamic and fluid, banks that fail to collaborate with third parties risk losing control of the customer dialogue as fintech companies form their own relationships, working with others to provide a full complement of services.
In the past, banks have collaborated with others in their industry to offer products and services, but these relationships are evolving. Increasingly, banks must collaborate with companies in other industries to generate value through new services.
These collaborations are evolving in industries such as telecommunications and retail. For example, Commerzbank Group’s mBank partners with Polish telco Orange Polka to offer joint white-labelled banking services for phones and tablets. On the other side of the world, PC Financial, a service backed by Canadian bank CIBC, provides ‘white label’ banking services for grocery firm Loblaws.
These relationships underpin one of Accenture’s next-generation banking models, which it calls the “financial/non-financial digital ecosystem” bank. The bank becomes a trust center, heavily invested in mobile technology to interact with customers, and providing them with services based on cross-industry partnerships. Similarly, the bank can provide services to other companies, such as know-your-client authorization. This is the age of the one-stop-shop bank that interacts with customers wherever they are, offering them whatever services they need.
Accenture draws parallels with disruptors in the technology sector, such as Google. The search company has created a gigantic ecosystem of integrated digital services, spanning cloud storage, mobile operating systems, music, and now mobile payments in conjunction with MasterCard and city.
Banks that form these partnerships stand a better chance of controlling the all-important customer relationship by developing the customer’s trust and by establishing their brand as a go-to place for products and services.
Banks have two choices: They can cling to market share and rely on inertia, or they can innovate digitally to extend their reach and improve their customer service. This often involves collaborating with disruptive forces in the financial services space to create new opportunities and extend their reach.
Smart banks are adopting the latter approach, embracing disruption rather than running from it or relying on regulation to stifle it. For example, CIBC has partnered with innovation hub MaRS to create a fintech cluster that invests in startups to produce technology that can help it to innovate. Another Canadian bank, Scotia Bank, created its own internal innovation lab called the Digital Factory, which helps it to focus on new products and services in mobile banking. Partnerships with fintech firms and startups is a big part of Scotia’s approach, and it has also Invested in US-based online small business lender Kabbage.
The emerging markets are just as much of a testing ground for digital collaboration as developed markets, explained the Banking Practice of global consulting group McKinsey in its 2015 report Reaching for the Stars. Banks in emerging markets that choose to embrace digital and mobile techniques could increase their return on equity by up to 5.5% within four years, it said. Conversely, those that fail to do so could half their return on equity. The age of the target market is particularly significant here; emerging markets contain 90% of the world’s population under 30, McKinsey pointed out, and this age group is among the most tech-savvy in the world.
When the evolutionary pace quickens, it is easy to be conservative and resist new developments. Relying on old models of operation will work for a while, but eventually those who embrace new ways of working will gain an advantage. Technology and new cross-industry partnerships will make them more responsive, and will enhance their services.
In this new environment, standing still is not an option. Banks must acquire the talent and the technological expertise to transform the way they operate. In the world of financial services, now more than ever, adaptation is a key skillset.