The future of Financial Services: Can the big banks survive and thrive in a digital market?
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Earlier this month Antonio Horta-Osorio, CEO of Lloyds Banking Group UK, gave a speech outlining his vision for how the industry and established banks need to change to ensure they don’t become the latest Blockbuster or Kodak of their industry.
It’s a timely reminder from the CEO of the UK’s biggest retail bank that customer loyalty, and therefore established market positions, cannot be taken for granted anymore. The digital revolution has already transformed industries, from shopping and hotels to taxis and food, and is longing to take a big bite out of the highly lucrative, high margin, retail and commercial banking market .
Disruption in financial services
Challenger banks first connected with consumers who had lost faith in major financial institutions following the global financial crisis. They challenge the traditional business model by charging transparent/low fees, providing faster services, and delivering a better user experience through apps with limited contact centre support.
The UK has seen the most challenger bank activity compared to other global regions, driven by regulation to promote competition and break up the banking monopoly. In response the likes of Tandem and Starling, with a traditional banking licence model, have taken initial bites of the UK current account market cherry but so far without really hurting banks like Lloyds, RBS, Barclays and HSBC .
The more innovative and fastest growing market challengers are perhaps more concerning to the major banks. Monzo and N26 (pre-paid card propositions now migrating to current accounts) and Revolut (currency exchange and crypto currency-based services) have already amassed 2.5 million customers between them.
Payments is another banking market which is being eaten by new challengers - in this case, at an alarming rate.
To take some examples, Adyen is a global payments platform that allows businesses to accept payments from major credit and debit cards, as well as mobile apps, Apple Pay and Google Pay, processing close to $150 billion in payments in 2017, up from $90 billion in the previous year for clients including Microsoft, Uber and Spotify.
Meanwhile, Stripe has changed the way businesses and digital marketplaces can take payments. Their technology allows customers to accept payments from every major debit and credit card in every country and in more than 135 currencies. At the time of writing more than 100,000 companies - including Gobeyond Partners - across 100 countries are using Stripe’s technology.
Finally, Veem allows businesses to send and receive payments around the world using a multi-rail approach. Payments can travel over the Swift network, third-party payment processing, or through blockchain technology, depending on which method makes the most sense, and currently serves over 40,000 customers in 60 different countries.
This type of growth through new and innovative propositions is starting to seriously hurt major global banks in the personal and commercial payments space.
One only needs to look to the hotel industry for a parallel of how the mightiest of markets can be eaten.
Since its first appearance in 2008, Airbnb (with over 4 million rooms now listed worldwide) has become bigger than the world’s top five hotel chains combined (Marriott, Hilton, Intercontinental, Wyndham and Accor Group). It is this type of stellar revolution which has banks thinking very hard about their own future.
So Horta-Osorio is right to give the witches warning to his own and other major banks: without rapid and fundamental transformation for a truly digital future, a set of markets considered sacrosanct for so long can disappear within an alarmingly short period of time.
He outlined four main themes which he feels should be considered when tackling this growing threat:
Customers are demanding a more personalised, efficient and frictionless service.
Technological innovations, such as digitalisation and robotic process automation, are making it increasingly possible for those demands to be met in a far more cost-effective way.
New thinking and capabilities are themselves opening the door for new and varied sources of competition.
Regulators are demanding that banks take action to allow choice and competition to flourish, through initiatives such as the revised Payment Services Directive (PSD2) .
Responding to great expectations
At Gobeyond Partners we work and speak every day with organisations from across the financial services industry, both here in the UK and worldwide. We see the themes outlined by Horta-Osorio as common across markets.
The challenge of course is in how organisations respond and, perhaps most critically given the pace of much of this change, how quickly they can respond.
As organisations grapple with these questions, we consider ten key themes which should guide their thinking:
1. Customer expectations are growing continuously and exponentially
Expectations are no longer driven by (or compared with) other financial institutions alone, they are now compared with all other digital providers and the online experience they provide. This is true of corporate clients too, where finance professionals will overlay their personal experience on to their experience with B2B interactions.
Customers and clients will therefore be far less tolerant of usability friction and of the need to drop out of digital for what they consider are digital appropriate processes (such as issue resolution, deeper data assessment or more complex transactions).
2. Seamless multi-channel approaches are the new normal
Clients will be far less tolerant of a two-speed or disconnected experience which sees other channels less developed or digital interactions far removed from human oversight and visibility.
This means organisations need to ensure that their traditional channels and operations are not neglected in the strive to move to digital. Organisations should also be cautious about using non-digital friction as a tool to migrate clients to digital, or indeed neglecting to understand that a significant volume of their clients and client interactions will remain non-digital for some time to come.
Channels will need to be equal and complementary in terms of their quality.
3. Preparing to reinvent operating models
Organisations will need to be flexible in reinventing their own internal operating and organisation models to align more to customer demands and experience than to the more traditional product or customer groups that have prevailed.
Realise that internal organisational friction will lead to limited customer journey thinking, increased cost and a general delay in getting solutions to market - all of which will be key to compete effectively with the new players.
4. Automating with care
The growth of digital will create greater opportunity to automate out processes, errors, complaints and cost.
Whilst this will be a hugely positive impact on bottom line, the key to automation will be about selecting the right processes to automate versus those which will retain greater value from human intervention.
Getting this balance right will be crucial to success in terms of both client experience and cost.
5.Tackling legacy IT architecture
Perhaps one of the most significant challenges for major financial institutions transforming themselves for digital is addressing legacy IT architecture. This will often stand in the way of new functionality and speed of response, as well as creating the risk of significant and embarrassing service outages.
Customers have far less tolerance for poor functionality, slow running systems and service interruption. Even though the investments are typically breathtakingly large, without a clear programme to tackle this as quickly as possible the traditional players will almost certainly suffer.
6. Embracing Fintech
Major institutions will need to recognise that innovation will most typically come from those looking ‘outside in’ to their industry and that organisations who focus on critical parts of their processes may well have far better solutions, which can be developed and integrated far more rapidly, than via their own internal teams.
Having an eye on Fintech won’t be enough – truly recognising, embracing and leveraging Fintech will be key to their success.
7. Seeing regulation as a ‘force for good’
Firms will need to understand that regulation is seen as a positive driver for change in the eyes of the customer and not as an ‘obstacle’ as they have traditionally viewed it. Embracing regulation and the opportunities it brings (such as open banking) will be key to thinking more like digitally-enlightened customers.
8. Learning from others and creating ‘collaborative innovation’
Be open-minded about what can be learnt from other industries, organisations and individuals, where traditionally it may have been felt (perhaps with good reason) that there was little to learn and apply.
The best skills and ideas are likely to reside outside your firm and the industry. Leaders will need to understand how they can attract that capability through various means, including innovation, incubation and investment programmes. They’ll need to be active in this endeavour themselves, whilst also encouraging their people to look outside of the company and industry walls for new stimulus and to create new collaborative and innovative alliances.
9. Knowing that we’ve been here before
In the 1990s the centralisation of service operations in banks and the ability to automate process was very much the order of the day, as large financial institutions sought to shed costs. One only needs to think back to the drive for image and workflow to recall the opportunities, and indeed the pitfalls. Automating poor or unnecessary processes is a risk for organisations who do not first of all understand and map the whole customer journey, then base their design around the customer needs alone. In summary, they must re-engineer in the right order to avoid locking in customer friction, waste, and risk whilst driving excess cost and lost income.
10. Seeking help
To truly land the changes required for digital transformation, organisations need to both create capacity and ensure that they have the help of specialists in critical areas, roles or domains.
The orchestration of the complex set of changes required to land such a change should not be underestimated and the value of experience and an external perspective in making this happen will be key.
All is not lost
Major financial services brands across the globe are now seeking to rapidly reinvent themselves, so they can continue to compete in this new and rapidly evolving environment.
However it’s not a completely bleak picture for the big firms, as it is also true that there are some very powerful factors on their side in the quest to survive and thrive, including:
Customer scale and inertia
Whilst customers across the age spectrum are now adopting digital technology more broadly and at a breath-taking pace (with Lloyds alone growing from 0 to 9 million digital users in just 7 years), the sheer scale of their customer bases (like Citi with 100 million customers globally and HSBC and Barclays with 38 million and 24 million respectively), mean that there will remain demand in ‘non-digital’ channels for some time to come.
Compound this with the fact that, despite industry efforts to take away the pain of switching bank accounts, it still feels like a huge obstacle and unnecessary pain for most and is a huge protection to the large market shares of the big players.
However with new entrants developing all-digital, almost completely frictionless account opening (try opening an account with Starling or Monzo Bank via their apps in around 10 minutes if you want to see what that looks and feels like), it is likely that this barrier will also diminish.
The pace of change in payment market share for new players shows that with limited barriers, large sub-markets to the main bank relationship can still disappear rapidly.
Non-digital demand continues
Multi-channel, non-digital demands (whilst far less ‘in vogue’ among commentators, CEOs and many of their advisors) remains high.
Channels including branches, telephony and face to face contact with a Relationship Manager, whilst falling, are still high and unlikely to disappear quickly. For example, 72% of customers at Lloyds still use more than one channel – and they handle 18 million customer visits every month across their 1,100 branches.
For many customers the trust of a major, recognised brand and the implicit (or explicit) security that brings is still a major retention factor.
Old habits die hard, and protestations from new providers about the high levels of security they deliver simply won't be enough for many customers. This is perhaps a barrier which will only fall across generations.
Whatever you may say or think about the world’s major financial institutions, it is clear that they are can source significant funds to invest in challenges such as this.
Whilst spending vast amounts of money doesn’t guarantee survival in markets (as history will tell us), it does make a big difference to your chances.
To this final point, Antonio Horta-Osorio’s speech was in part a follow on from his announcement to the market in February that he was committing £3 billion to their Digital Strategy over the next 3 years.