What's this all about?
In part one of this article on the Bank of 2020, we talked about the evolution of different industries, how they have adapted to change and how they did it by building a marketplace for others to earn value. In this, part two, we look at how traditional banks can fight back against the neobanks and niche players that are eating into their profit margin. And ultimately, what a bank in the future might look like.
Read on if you:
- Are launching a digital bank
- Are considering digital transformation
- Are interested in what banks need to do to succeed
The ‘bank of 2020’ has already started to take shape in a little construct known as the ‘challenger bank’. It seeks to change the face of banking and has fintech folk spitting out words like ‘disruptor’ and ‘gamechanger’ until they’re blue in the face.
These start-ups won’t have a separate Head of Innovation cordoned away in a back room. The entire business is focused on innovation, on ways to deliver a better UX. They’ve seen the stats. They know that 73 per cent of banking transactions are set to be carried out on smartphones by 2020 and that the mobile banking experience should, therefore, be a brilliant one.
Like transport, music and accommodation providers that don’t own cars, music or hotels, these guys don’t run their own bank. Instead, they’ve taken the organisation of services from centralised institutions and put them firmly in the smartphone-loving hands of their customers. They’ve utilised technology to dream up and try out brilliant, innovative services – and they haven’t had to worry about overheads, either.
“Good for them”, you may think, but how are traditional banks meant to compete with that? Well, we have some good news and some bad news…
The bad news
If you’re a traditional bank, your best ideas go straight in the bin. You’re probably well aware of the changes going on within the industry and you’re keen to keep up with challenger banks by moving forward and expanding your own offering. But you’re shackled by legacy systems, which are costly to maintain, complex to navigate and thus, allergic to any form of innovation. It’s not surprising since the software you’re using was built by different teams, in different languages and in different locations back in the 1970s!
So even if you come up with a brilliant idea for an add-on customer-centric service, that idea will need to break through the increasingly stifling layers of processes, overheads and risk assessment. It’s likely that you’ll be told to keep coming up with ideas (in line with the bank’s commitment to ‘modernise and innovate’) but they’ll never actually bear fruit. It won’t be the most rewarding job in the world. Nor will it result in anything close to great customer experience – and isn’t that what we’re all striving to achieve at the end of the day?
The good news
As a traditional bank, you have a lot going for you. Because even though age-old processes and centuries of tradition can act as barriers to innovation, owning the customer relationship is the most important part of any business. And this is something you already have.
Some of the new entrants are buying off-the-shelf banking software. Most of it is old technology simply moved (ahem) to the cloud, taking with it all the problems it had before. Some niche players will also rely on traditional banks, as partners, to complete their offering.
This is music to your ears because using the same old technology will produce the same average user experiences.
No. Banks aren’t going to disappear anytime soon. They’re too experienced, too intelligent and make way too much money to be complacent.
With experience comes responsibility and credibility. Sure, the reputations of established banks have suffered a blow in the past few years. But many customers are still reassured by their physical presence, shrinking as it may be, and are more trusting in an institution that has been around for so long.
Can newcomers achieve this credibility instantaneously? Probably not.
The truth is that the average customer is more likely to put their money into a major bank than a six-month-old start-up. But that doesn’t mean you can sit back and relax. Customers can be pretty fickle – so once you engage them, you need to keep them.
What to do?
Nowadays, this means offering customers the kind of banking experience that they won’t get anywhere else.
Modernise your customers’ banking experiences in line with the market’s changing habits. Most likely, that’ll mean your physical branches disappearing entirely (eventually) and transactions occurring digitally. Every financial transaction that users make, whether booking concert tickets, buying groceries or applying for a mortgage, can be your opportunity to engage them, to reward them and to provide a real-time, seamless experience whatever device they’re on.
2. Focus on data
Unlock the power of your customers’ data. You’ve spent years building it up, yet it remains largely untapped. It’s incredibly powerful, you just need a system in place that can help you to monetise it. Simple actions, like offering them cash rewards when they pay off their loan on time, can have a huge impact. And with the new open banking standards that make this data much more accessible, it’s never been easier.
3. Build your bank on a platform
Building your bank on a modern SOA-architected platform hosted in the cloud provides you with an almost endless list of advantages. Speed to market for both new banks and new products, low capex/opex, the ability to access data you never could before and to deliver delightful user experiences are but a few.
And of course, third-party integration. A banking platform built on open-source components, using open standard formats, APIs and protocols ensure new technology innovations are easily integrated.
You can never be the sole source of innovation and you would be silly to think you can do everything. By sitting on a platform, you can plug in innovative third-party services to bring your customers the products and experiences they’ve always desired. It’ll also remove complexity, risk and regulatory updates, so you not only survive but thrive amidst the noise of challenger banks.
This will be the only way you can compete in the new banking world. But how do you do all this with the technology you currently have?
Unfortunately, you can’t.
Old legacy systems and most core banking software systems hinder even the slightest hope of innovation. Sure, you can create a better user experience on the front end, but ultimately you are limited in what you can do by the back end.
Building a bank on a modern platform will keep any bank up-to-date with technology change and allow innovation to flourish.
So what does the bank of the future look like?
The future bank
The future of banking looks a lot like what email, messaging or social media is today: free to use with the ability to connect users to products and services they want and need. Banks will go from being a profit-focused business to a relationship and service provider. Essentially a platform that connects every aspect of the user’s financial life.
We can already see this from a social standpoint in China with WeChat and that is where Facebook messenger is heading here in the West. In the next five to ten years, I see banks using platforms like ours where their core banking products and services will be delivered in real-time and completely free.
The future bank will make money by creating new ways to deliver value through data. This will happen by banks opening their platforms to third-party products and services that are not core to the bank. Ultimately, banks will become data platforms and to a lesser extent, banks.
As Chris Skinner writes when he talks about us in his blog post The Banking Bazaar and the Bizarre Banker: “They are different. They understand the orchestra and how to be a conductor.”
To wrap up…
Can a traditional bank thrive in 2020? Yes…if it’s willing to evolve. The ‘new’ traditional bank will offer core banking services such as deposit accounts, savings and payments for free.
They will continue to make money from products such as lending and will seek growth through revenue sharing with third-parties by integrating market innovation.
All this will deliver the kind of rewards-driven, smartphone-optimised services that customers have come to expect, with beauty and simplicity at the core of every transaction.
We’re excited about the future of banking.
You should be too.
This post was originally published by LEVERIS in September 2016.