Outlasting the banking industry’s disruptive innovators

By Karen Wheeler, Country Manager and Vice-President, cxLoyalty

For the past few years, digital transformation has been the word on the lips of the banking industry and the pace of change is about to increase. The big five global technology firms – Google, Apple, Facebook, Amazon and Microsoft (GAFAM) – have started disrupting a vast array of industries. Whether it’s Amazon entering the insurance industry or Microsoft and Google embarking on the autonomous car journey, these technology goliaths continue to thrive. Banking is no different.

Thanks to the introduction of PSD2, GAFAMs can now gain access to customer information with the customer’s permission and use this data to drive their own innovative solutions. With the monetary power these businesses have – alongside their digital expertise and all the information from their existing customer relationships – such insight will prove priceless and could truly change the face of banking with the right product.

What about the challenger banks?

Challenger banks have continued to spill into the market looking to change the way consumers interact with their banks. While any fears that these start-ups would enter the fray and immediately begin to steal market share have been proven wrong, they have driven up expectations for a slick customer experience. Many are viewed as secondary banks with an interesting USP, rather than being positioned as alternatives to traditional retail banks.

When discussing the introduction of Open Banking across the EU, Paul Riseborough, CCO at Metro Bank predicted it could take as long as five years before the “average man in the street sees any real value.” Despite this, PWC research found 88% of the financial industry is worried they will lose revenue to disruptive innovators. Clearly, it is the GAFAMs which have the greatest potential to transform how customers engage with their banks and the wider industry as a whole.

Rise of the innovators

China’s WeChat app is a perfect example of how the rules of engagement between financial institutions and technology platforms could change. The app launched in 2011 as a messaging platform similar to WhatsApp but has morphed into an ubiquitous app with more than one billion users globally which allows people to do everything from order a taxi and arrange doctors appointments, to money transfers and other banking processes.

If GAFAMs produce this type of all-encompassing product and introduce it to their loyal subscriber bases, retail banks risk falling behind as they will lose their differentiating factor – data. With consumers moving to third-party technology to manage their financial transactions, engagement levels with banks could dwindle, and the customer experience would no doubt suffer. So, what can retail banks do to combat the torrent of disruptive innovation and how is the industry already responding?

Strategic innovation

While the likes of PSD2 and Open Banking clearly pose a serious threat when utilised by GAFAMs, there are also opportunities for banks to drive innovation using the vast array of data they already have on their customer. As a recent McKinsey report notes, banks may actually be at an advantage, as “customers would not find it attractive to provide third parties access to their data or accounts.” If a strategic approach is taken before technology goliaths transform the industry, they may actually strengthen their market position.

RBS, for example, has this year announced it’s working up plans to launch a standalone digital bank to compete with online challengers, from Monzo and Starling to GAFAMs. This isn’t just the case in the largest financial markets either, as 84% of Indonesian banks plan on investing in digital transformation over the coming 18 months.

There are also global collaboration networks growing in stature which actively encourage software developers to use existing APIs to build innovative platforms which can enable retail banks, wealth management firms and fintechs to improve both the internal and customer-facing elements of their businesses. For example, the Avaloq Developer Portal currently has more than 1,000 developers collaborating and sharing knowledge to drive innovation across the global financial sector.

Clearly, retail banks understand the threats posed and are rising to the challenge. It’s therefore vital that investment is spent in the right areas.

Adding extra value

The disruptive innovators which have already stolen a march on the industry have done so by pushing past the perceived limits of traditional banks. This is an area which retail banks must investigate – and many are doing so.

For example, in response to Venmo marking its territory in the instant transfers space, many banking goliaths such as Bank of America, Citi and Wells Fargo have partnered with US digital payments provider Zelle which integrates directly with their banking apps.

They can go further though by looking at non-banking services which ensure retail banks are making a significant impact on their customers’ lives. Whether it’s integrating with insurance providers or simplifying utility bills, it will make consumers much less likely to turn to GAFAMs when their products hit the market. In fact, our ‘Connected Customer’ report shows businesses that offer three or more additional products have considerably higher customer engagement scores, resulting in customers staying longer and spending more. This is just as applicable to the banking sector.

Collaborate and thrive

With the introduction or PSD2 and Open Banking, it’s clear that the next five years will be a time of change in the banking industry. As GAFAMs enter the market, retail banks and fintechs must produce in-depth plans with the imminent threat these technology giants pose at the forefront of their minds.

If the retail banks and fintechs continue focusing on innovation while working in flexible, collaborative ecosystems, they will improve their services and stronghold on the industry simultaneously. The benefits of this alongside the introduction of new players in the market will be felt by everyone – from financial professionals to the consumers themselves. After all, with more choice comes a stronger focus on customer experience.