The future of digital banking: sustenance or disruption?
Banks should not be blind-sided by sustaining innovation: a large part of their digital initiatives look at delivering existing services cheaper, faster and (sometimes) better – but true disruption occurs when addressing customer needs better, faster and maybe, cheaper.
Technology does not disrupt business: it creates conditions that, over time, disrupt industries, writes Anshuman Singh. The concept may be relatively new to the banking and financial services industry but industries like retail and travel are great places to learn about disruption and coping strategies. Retail went through disruption at various points in the last two decades – and it is not yet over. Books, music and media were the first casualties a decade ago. As consumers got used to buying online and retailers optimised their supply chain, apparel has followed in the last five years. We believe that this disruption is taking root for banking, significantly change it in the next five years and make it drastically different in 10.
In summary, technology allows changes that fundamentally transform how people buy from you. It changes the role you play (or can play) in fulfilling the customer need. It is not an event but a process usually unfolds over a period and it begins at either end: high profile changes (such as Apple and Google eating into Nokia’s business) and low profile changes that start targeting your least profitable customers (such as low-cost airlines targeting young leisure traveller).
Travel is a great example of this: the internet took out travel agencies; low fare carriers could reduce marketing and distribution cost by connecting to the consumer directly and passing on the benefit. In banking, this process has started to unfold, e.g.
- CommonBond connects alumni to students and offer loans at 1-1.5% less interest
- TradeShift provides cash against accepted invoices through real time credit-checks of the buyer (usually a large business) than Supplier (which might be a SME/SMB).
- Zopa offers 4.9% to lenders and charges 5.6% to borrowers
- Bondora a peer to peer lending firm promises 22% ROI for investors
- Currency Fair promises peer-to-peer money transfer at better rates than banks
Technology allows keeping the transaction cost low and credit-information accessible. At present, it is a tiny fraction of the overall retail business. However, disruptions start small and reach a tipping point at around 15% adoption. Disintermediation potentially threatens one of the cheapest sources of cash and profitable sources of income. Regulators have already stated to take notice of this; it is a strong opportunity for banks to connect two customer segments i.e. retail investors and SMBs. However, if banks need to address this segment, they will have to rethink their credit-risk policies along with the IT systems that will address these.
Value vs. Convenience (and the rise of the new intermediary)
Three companies that you might have used before 0900 – Transport for London, Starbucks and Apple – have vast sums of deposits at zero interest on Oyster, iTunes & the Starbucks Rewards Card respectively. Estimates suggest that there is £100 million of unused funds on Oyster and $4 billion worth of funds are loaded in the Starbucks Reward Card (company revenue $14.9 billion). This demonstrates that consumers prefer convenience over value for daily transactions; as the retail environment matures digitally (including the internet of things) more companies will own this channel and, along with it, the information consumers generate about their buying behaviour etc. This, in turn, will cause banks to become secondary in the relationship hierarchy. Banks can use these as opportunities to create loyalty platforms bringing merchants, consumers and payments together.
Should Customer Experience be the new measure of performance?
Data from the UK’s Current Account Switching service suggests that the biggest gainers are banks offering ‘rewards’. Rewards are effectively discounting – an indicator of little differentiation in the value propositions; it is a downward spiral. For example, the percentage of fast-moving consumer goods in UK moving on deals has reached the 51% mark. When faced with commoditisation, businesses always reinvent the product with a focus on a new measure of performance.
- In the consumer packaged goods industry, anti-aging creams, three-blade razors, fortified milkshakes, are examples of this; they all sell at a premium and not on deals.
- The travel Industry is focusing on customer experience as the new measure of performance. Marriott Red Coat Direct is an initiative that has the customer at the heart of it; it designed to allow existing employees serve the customer better and not aimed to reduce the work force. British Airways is looking at the customer journey from home to hotel and making it stress-free. They are working on creating platforms to expose information to allow partners to integrate better and to increase innovation manifolds.
- Similarly, Coca-Cola is building API platforms to allow integration. Unilever Foundry is an initiative to foster innovation to deliver the best value to the customer.
In conclusion, most disruptions begin as what I would call the Sinking Ladder. These start unnoticed at the bottom and slowly inch their way up; they take away more customers and segments that are more profitable at a time.
It is vital for the banks to focus on what keeps their world spinning (like mobile access to account balance) but also on where it is going – the longer-term changes that will truly disrupt the banking industry. Banks need to answer how they can address the customer needs better, faster and cheaper and not how they can deliver their existing services cheaper, faster and maybe better. The best place to start is by looking outside the industry.