In wake of disruption from multiple fronts, banks face new realities
Blog: Capgemini CTO Blog
While the recent pace of disruptive transformation may seem unprecedented, the financial industry has undergone change before. Credit cards made their debut in the 1950s, ATMs in the 1960s, banking by phone launched in the 1980s, followed in the ’90s by internet banking, and smart-phone mobile banking in the 2000s. More recently, however, the rapid and ubiquitous adoption of digital among customers and businesses has left an indelible mark. After the 2008-09 financial crisis when customer confidence was low, and banks were forced to reevaluate their balance sheets, agile, tech-savvy FinTechs exploited the situation by delivering transparent, efficient, cost-effective, and convenient services.
Initially seen as foes with the potential to upend traditional banking, now FinTechs are embraced as value-adding collaborators. However, banking hasn’t come out of the FinTech wave unscathed. Disruption, innovation, and trends have driven irreversible changes.
Superior customer journeys become a top priority
Digital pure-play service providers such as Amazon, Uber, Ant Financial, Google, and Apple (BigTechs with a significant retail customer base) continuously reinvent themselves to provide consumers immediate and personalized yet simple experiences.
Today’s bank customers are shaped by their experience with BigTechs, FinTechs, telecom, social media, ecommerce, and other service providers, and demand prompt and hassle-free services – available at their fingertips. Digitally-empowered customers now expect banks to proactively identify their needs and preferences to provide precise services at the desired touchpoint. These days, less-than-optimal service can translate to lost customer business.
Bank executives interviewed in the forthcoming World Retail Banking Report 2018 say they are well aware of the implications of not living up to customer expectations, and are taking steps to future-proof their firms.
Unexpected competition
Today, banking isn’t exclusively about banks. While customers need financial services, many are looking beyond traditional banks for support. Initially, FinTech firms may have been thought to provide a better value proposition for similar banking services, but nowadays, the realm of providers includes digital-only challenger banks. BigTechs and even other non-financial service providers are taking advantage of blurred industrial boundaries in this booming worldwide digital economy.
This new competition doesn’t necessarily aim to offer comprehensive banking services, but is instead targeting certain services – payments usually being the first. For example, Chinese giant Ant Financial started with payments services meant to boost Alibaba’s ecommerce business, but now it has expanded to include a range of services from lending to insurance to wealth management. Similarly, Amazon now offers payments, small-business lending services for sellers, and credit cards. Such offerings, combined with massive adoption, may steal chunks of bank business that hit both the top- and bottom lines.
Product portfolio competition is another challenge as other firms launch financial products that are different from banking, but attractive to customers. Examples include PayPal’s single credit-line offering for customers that eliminates the need for bank services such as payments, credit card, POS or consumer financing, and overdraft protection. If banks lose their relationships with these customers, the risk of becoming a mere utility provider becomes real.
Emerging technologies challenge traditional ways of working
Technology such as advanced data analytics, robotic process automation, artificial intelligence, and distributed ledger technology show promise to transform banking operations to save costs and improve customer experience. Yes, these emerging technologies present an opportunity, but they also require banks to overhaul processes, re-skill staff, and make sustained efforts to implement new technology-based applications. Moreover, technology alone cannot be of any use unless organizations build cultures that adopt and encourage digital ways of working. Similarly, regulations such as the EU’s PSD2 (that aim to enhance industry competitiveness) will boost broad adoption of open APIs and platform-based businesses.
Disruption: a blessing in disguise?
Though disruptive factors are somewhat beyond the control of banks and will keep taking their course, banks can determine their response to change. Considering the current set of challenges, banks could reconsider their technological, operating, and business models. Their technology model could be one that enables effective data utilization, better product management capabilities, and easy adapters for third-party connectors. Their operating model will take a course where cost savings are derived with the help of automation or similar solutions without compromising on customer experience. Banks will also look to devise business models that incorporate collaboration, probably including BigTechs, and offer new revenue streams from financial or non-financial services that are adjacent to current banking value chain.
Overall, it will be important for banks to be fully cognizant of the challenges they face, the potential impact, and the transformational steps necessary to develop business and operating models best suited for tomorrow.
To deep dive into how banks are preparing for the future, access the World Retail Banking Report 2018.
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