World banking report: Banks challenged by tech alternatives
Starling Bank
Credit: Starling Bank

World banking report: Banks challenged by tech alternatives

UPDATED As customers of high street banks NatWest and RBS in the UK found themselves unable to bank online or from their mobiles on 21 September, the topic of digital banking has rarely been so tense for millions of people.

A survey of banking customers across the world, carried out by technology consultancy Capgemini and finance association EFMA, reveals how many would now consider non-traditional tech alternatives for their banking needs.

The report was based on a survey of over 10,000 customers, across 20 countries, and 60 interviews with senior banking executives.

It found that consumers are increasingly open to what the survey calls ‘BigTech’ alternatives to traditional banks. Nearly one-third of customers (32 percent) might consider BigTech for financial products and services, it says, including 43 percent of Generation Y respondents, 53 percent of tech-savvy consumers, and 70 percent of those already likely to switch their primary provider.

Personalisation was identified as key to customer satisfaction, which was notably higher among those who had been offered personalised digital experiences (49 percent) than those who had not (40 percent).

Commenting on the findings, Anirban Bose, CEO of Capgemini’s Financial Services Strategic Business Unit, said:

With FinTechs, BigTechs, and other non-FS firms finding their place in the market, retail banking today is all about the customer experience when interacting with their financial institution.

“As a new, open ecosystem – comprised of customers, traditional banks, non-traditional firms, regulators, and developers – takes shape, there is now a clear opportunity for banks to leverage digital transformation to retain customer relationships by re-inventing the customer journey and creating new revenue streams.”

Open Banking opportunities

The report also surveyed banking executives about what they consider to be the main causes of industry disruption. Of those surveyed, 71 percent believe that positive experiences in other sectors mean customers now expect more from their banking provider.

Regulatory pressure was also cited as a cause of disruption by 58 percent, with PSD2 and Open Banking causing headaches for many established banks. Fifty-four percent of executives also felt that increasing demand for digital channels played an important part in the change.

As digital transformation sweeps through all industries, the lines between them are being blurred, says the report. Banks now face competition from non-traditional firms that are targeting niche areas of banking and offering improved customer experience, via innovative digital solutions.

However, despite the threat from challenger banks and BigTech, banking executives are optimistic that they can use this change to their advantage. Seventy-one percent believe they can “generate non-traditional revenue” by working with FinTech providers, either to develop new services or distribute third-party products via a marketplace platform.

Secretary general of EFMA, Vincent Bastid, said:

The retail banking industry is at an inflection point and needs to determine its role going forward in the open banking ecosystem. There is opportunity to innovate through collaboration as well as reinvention. It is an exciting time to be in banking, as regulation, innovation, competition and collaboration merge to form the bank of the future.

Most banks believe there are untapped opportunities to make more strategic use of data to improve the customer experience. Eighty-eight percent of executives said they plan to use customer data to create smoother customer journeys, while 75 percent hope to develop relationship-based pricing. Meanwhile, 58 percent plan to build personalised loyalty, and 54 percent have their sights set on creating “lifecycle stage” products and services.

Internet of Business says

While many banks are still getting to grips with using and managing customer data in this new world, and building new internet banking and mobile systems, challenger banks, such as Starling and Monzo, together with FinTechs, are creating innovative applications and services that are ahead of the customer experience elsewhere.

Mobile banking looks set to overtake online banking next year and cash machines are closing at record rates. Consumer banking is increasingly a digital, mobile affair. Customers expect instant notifications of payments, access to their accounts, contactless mobile payments, and insights and tools in the palm of their hand.

Many people are now tracking their physical health and wellbeing on their watches and smartphones, and are leaving laptops behind in place of truly mobile computing. We now demand the same of our banking, too. Open Banking has enabled exactly this, putting financial data back in the hands of customers.

The likes of Starling Bank are capitalising on this by offering a marketplace where third-party developers can use their API to create new services, allowing customers to link them to their bank accounts and seamlessly manage investments, pensions, reward schemes, and more.

Many traditional banks, though aware of the opportunities, have been too busy scrambling to update their legacy systems and become compliant with PSD2 to focus on adding value to their customer-facing applications or improving the user experience.

The fiasco of TSB’s recent system update problems – which left some customers unable to access services for days – is a glaring example of how badly wrong IT updates can go in the industry (as even more recent cases, such as NatWest and RBS demonstrate).

The opportunities are still there, however, and banks should leap at the chance to offer new value to their customers, enter into deeper relationships with them, and gain new insights.

The start-ups that threaten the banking status quo are also there as potential partners. Their technical knowhow and imagination can be combined with the long-term trust and expertise that an established bank possesses. Deutsche Bank is a prime example of how this can be done.

Such companies are looking to make banks more relevant on a daily basis and have adopted a strategy of building platforms influenced by client, technology, and regulatory trends. This focus on providing greater value to users via apps and AI, offering financial advice and other guidance, is crucial to successful digital transformation in the sector.

The shift from legacy systems to agile APIs represents the technical crux of the issue. Banks like Monzo are being designed, in effect, from scratch to be adapted and extended in an iterative way, capitalising on the latest technologies and regulations along the way.

The legacy systems of established banks may be holding them back, but with significant funding, the right partnerships, and the examples set by trailblazing challengers, we will soon see more widespread innovation.

For more on the digital challenges and opportunities facing the banking industry, the Internet of Banking and Payments takes place 20-21st November 2018, London.