Digital disruption: Is this the end of the retail bank as we know it?

A juxtaposition exists in the retail banking sector involving what banks think their customers think of them, and what their customers actually think of them. So much so that a recent IBM study into global banks revealed the industry equivalent of the emperor’s new clothes.  

Surveying over 1,000 banking executives across 38 countries, IBM found a sector seemingly comfortable with its wardrobe, with 62% of respondents believing their bank was delivering excellent customer service.

And 96% of the bankers surveyed also felt that their customers trusted them and their banks more than they trusted other non-banking competitors.

Yet the caveat to this study was that it also asked the same questions to 1,600 banking customers across the United States, Germany, United Kingdom, Singapore and China, with somewhat different results.

Only 35% of customers felt their bank delivered excellent customer service, while 30% said they didn’t trust their banks.  Meanwhile, even though customers and their banks agree on the growing importance of mobile banking, only 10% of bankers thought that the majority of transactions would be conducted through mobile devices in the near future.

Forces of disruption

This last point is crucial, because whether bankers do or don’t see it as the go-to for future transactions, mobile banking is often held aloft by most incumbent retail banks as proof that they have kept on top of the rapid digital movement in the last 10 years.

Yet most experts will tell you that offering a mobile banking service is just the tip of a very large digital iceberg for banks. Indeed, according to a number of sources, the sector as a whole is currently staring down the barrel of a gun.

In his new book Bye Bye Banks?, co-authored by Shane Richmond, Adaptive Lab’s James Haycock states a number of factors centered around digital disruption are currently forcing incumbents into the firing line.

The perfect storm of mobile devices driving us towards a cashless society, regulatory changes allowing smaller players to have a footprint in the market, customers having the freedom to switch providers more efficiently, and most importantly, customer expectations around what a digital bank is able to provide, means banks are having to completely rethink how they can meet the digital demand in order to maintain customer loyalty.

“Banks are being unbundled,” Haycock says. “New businesses are coming in and doing little slithers of what banks have historically done – wealth management, payments, etc. Younger, smaller, nimbler, leaner businesses can offer a far better experience as they don’t have the legacy.

“A combination of things are leading to this. It’s easier to launch a business than it was. The capital is available to build a global business quicker; the cost of entry for tech start-ups is lower; the speed of distribution is far quicker. In financial services, regulations have previously been extremely protective of incumbents, but now, for instance, the change in the application process for banks has become much easier and there is more competition.”

Better personal service

There are said to be as many as 25 challenger banks in the UK either granted or awaiting regulatory approval from the Financial Conduct Authority that are set to add to the competition that incumbents in the sector are facing.

In each case, new entrants and fintech startups are focusing on the retail banking “slithers” that Haycock mentioned, with new banks like Atom going straight for the incumbent’s trump digital card, by offering a complete service solely for mobile devices. But beyond this there are also brands like TransferWise offering huge savings on overseas transactions, FundingCircle offering to “revolutionise the outdated banking system” through small business loans at far more affordable rates, and Mint.com, which offer a unique type of online, automated personalised financial management tool, plugging into users’ existing banking transactional details to give them a better understanding of their personal finances.

This latter tool is of particular interest, firstly because it ties into new EU regulations called the Payment Accounts Directive (PAD) which require banks to enable third parties to get access to account details and transactions by law, if the person authorises it. But secondly because it ties into the rise in consumer expectations around personalisation across digital channels.

According to Collinson Group research, 64% of global banking consumers want more personalised communications from their banks, yet 83% of UK consumers feeling their bank does not know or understand them and less than a third (27%) feeling they receive a high level of personal service. This aspect, says Haycock, is something that incumbents are currently struggling to grasp: “It’s about the interface itself. All the banks have improved their digital experience – but with banks at the moment, everything is organised around the different products they have, despite customers not necessarily thinking about banks in this way anymore.

“As an example – I bank with a business personally, but I also use the same bank for business purposes. So I hold a number of financial products with this organisation, yet they can barely recognise this when I call them. That kind of thing is extremely frustrating. They rarely have a joined-up view of individuals, and I have to download a PDF if I want to see statements beyond 12 days previous, and even then the page can only display a certain number of results. The opportunity of digital and web is the opportunity to do smarter things, so why doesn’t my statement order things by volume of transaction? Why can’t I group payments together? The statement is just one example of something that could offer so much more but just doesn’t. The banks haven’t yet caught up.  

“A lot of banks talk about being customer-centric, but there’s some issues around the proposition for different segments. At the moment, everybody gets the same experience. Wouldn’t it make more sense to offer different approaches to different groups? Does a millennial need the same proposition as someone aged over 65?”

Legacy systems and data

It’s no surprise that legacy technology is at the heart of these incumbent struggles, but is some cases 30 years of legacy is crippling banks, especially when it comes to their consumer data, the most crucial component of offering a personalised, customer-centric service.

“There’s both opportunities and challenges around data,” Haycock explains. “Customers are becoming more aware of the value their data is worth. There’s lots of talk around the potential opportunities of data for banks, but none of them have really got a grips of how to leverage it using the knowledge of a whole customer base. What insight can be drawn for all this customer activity? It’s not just about targeted rewards either, it’s about end-to-end personalisation.  

Greg Hanson, vice president business operations EMEA at Informatica, has written at length on the topic and believes incumbents must create a “culture of data” if they are to ever firm up their understanding of personalisation and be able to compete technologically with new start-ups. He believes banks need to make more noise about data as a strategic asset and a source of competitive advantage, and make all employees more aware of its value.

“One of the largest impediments to better data [use] is lack of understanding through the business,” he says. “Once data officers have written policies, established norms and deployed the right tools, they will have to undertake educational programs throughout the business. Employees should be made aware of how and where to access the right data for their purpose, and also how and why they should collect data in a certain way. These points ensure that a stable data landscape can be maintained, as opposed to staff going against policy and, for example, building up a new dataset for a particular project instead of accessing the golden source.

“The culture of seeing data as the preserve of the IT department needs to be changed as well. At the end of the day, it is not the IT department which will be actually using the data, but product development, sales, marketing, and other customer-facing staff. Data governance should ensure that all types of data are freely accessible to those who need it, giving the best chance of the right products being developed and then offered to the right customers at the best times.”

However, Haycock says that trying to create a culture of data may not be enough, and that the only way incumbents will be able to match the rise of the tech start-ups to create subsidiary-style forms of ‘beta bank’, in order to be able to start from ground zero and match startup banks for their leanness and speed of delivery.

In Bye Bye Banks?, Haycock states the beta bank must hone in on digital transformation as part of its evolution, improving customer experience as customer expectations evolve, adopting new technologies, partnering with startups and putting innovation at the heart of the bank’s philosophy:

“The Beta Bank might sound like a big undertaking but there are sound business reasons for following the [beta] strategy. The primary reason is capital efficiency. Digital transformation can cost millions, or even tens of millions, in the planning phase alone.

“The Beta Bank is customer, rather than product orientated. Instead of starting from financial services products, like current accounts or mortgages, the Beta Bank designs its services based on the needs and behaviours of its target customers, the lifestage they’re at and the journey they’re on.”

This may seem like a utopian view of a retail bank at present, but research suggests it won’t be long until startups start to truly eat into the banking incumbent’s market share.    

Writing in Computer Weekly, David Moschella, research director at the Leading Edge Forum argues that digital disruption is the greatest threat to businesses across industries, and that banking sits dangerously open at the bottom of its league table of disruptors vs incumbents (see below), matched only by insurance and manufacturing. And while the lack of disruptors may, at first glance, seem like a positive thing (and perhaps go some ways to explaining the arguably naive viewpoint of many bankers in IBM’s earlier study), it can only mean one thing: the disruptors are coming.  

“Digital disruption is a matter of fact in every sector, and banking is no different,” Haycock adds. “And of course it’s no surprise customer expectancy is at the heart of this. If I use a debit card, I want to see the transaction in my account straight away. I can send a text message instantly, a WhatsApp message instantly, yet I can’t get anything from my bank instantly. Why is that?”