According to a report by Deloitte, “European banks have not made returns in excess of their cost of equity, and they are not expected to do so for several years to come.” Faced with new regulations and a complete overhaul in the way consumers think about their finances and payments, should retail banks build on their many existing strengths, partner with new fintech competitors or fully embrace the digital age to remain relevant?
A steady hand on the till
Despite their many woes since the 2008 crisis, retail banks remain the backbone of the financial industry today and while many experts are urging them to reinvent themselves, others argue they should build on their many existing strengths instead to adapt to the new market conditions.
Over the years, banks have established their brands with significant market penetration and distribution. They offer stability, a tangible presence on the high street, and are far more trusted by consumers than financial startups. Banks also have access to capital and have experience dealing with regulations and compliance.
One of their primary advantages is the infrastructure they’ve built to manage the flow of payments, which they’ve extended through partnerships with other financial institutions. All of these factors lead some experts to encourage banks to adopt new strategies rather than consolidate or collaborate with fintechs.
That said it’s not quite the status quo. There’s no doubt in anyone’s mind that banks must evolve to respond to new customer expectations because, one day, a financial startup will have the capital and the know-how to create the ultimate “bank in an app” offering a full service financial experience. So what can banks do to adapt?
Any change in the banking industry will require new thinking, more in line with the technology industry, which is already agile and customer-driven. It may be difficult to imagine that banks can change but it’s definitely possible.
Take the Bank of East Asia for example. They won the 2015 Global Banking Innovation Award for channel innovation. To reach more tech savvy customers, the bank decided to create flexible digital branches. These mini-banks can be operational in just 13 days, take up half the space of a traditional branch, and require much less staff, which enables them to be set-up in shopping malls and other non-traditional spots.
Among the many innovative digi-tools developed by the bank are interactive touch screens, which transform into video interfaces when there’s a need to communicate with staff, an interactive financial planner, credit card self-application, and a browser to download further product information. And the results are impressive with an increase of 35% in deposit balance per customer and 65% in average mortgage drawdown compared to other branches.
The Bank of East Asia’s creative rethink demonstrates that it’s possible for banks to remain the trustworthy, stable institutions that they are, while also adapting to the needs of a changing market. As for banks who don’t have the capacity to develop such innovative digital channels, they should consider partnering with those who do.
Sharing the load
An extensive survey of experts in the financial industry by Deloitte reveals mixed responses when it comes to developing a strategy to tackle competition by non-banks. Many support an “if you can’t beat them, join them” approach. Proponents of this strategy argue that banks and fintech companies possess distinctive skills and that partnerships or buyouts would allow both parties to reap the benefits of their respective expertise.
While banks have many existing strengths, as mentioned earlier, they’re also subject to many regulations, which place them at a disadvantage when vying for customers against non-bank competitors. Banks also use complex legacy systems, which are difficult to modify thus limiting their ability to change. Non-banks are not bound by these challenges and can pick and choose the most profitable services and those that are the easiest to implement.
Non-banks also use more nimble systems that allow them to take the pulse of the market and respond more quickly to any change. These systems enable them to collect precious customer data, which they can use to tailor their products and offer great customer experiences. Banks need this data for credit scoring and selling other products so a partnership would enable them to access it.
Data is also a source of added value for customers to manage their financial health in an age when consumers keep track of everything from what they eat to how many steps they take in a day. Most banks are not equipped to keep up with the demands of customers who want the same types of apps that have become a mainstay in other areas of their lives.
This is particularly true in the area of payments, where partnerships could benefit both sides the most. Historically, banks have been in control of payments systems around the world both “in the so-called “front-end” where customer payments are initiated and the “back-end” where payments are processed,” explains the Deloitte report.
But fintechs are a lot more adept at creating and offering great front-end customer experiences, which are more in line with changing consumer preferences. They don’t, however, have the infrastructure to underpin complex payments systems. This explains why more than 80% of experts are encouraging industry collaboration in non-card payments and 75% in card payments, according to the results of the survey.
Apple Pay is a good example of what such a partnership could look like. Consumers get the convenience of a safe and simple mobile payment method that uses a device they already own and carry everywhere with them, but the system is “built on top of existing bank systems and payment rails,” explains TechCrunch.
Ultimately, the main winners will be consumers as they get the apps they want but also the security and stability they have come to associate with banks. “Both the old and new worlds will have no choice but to find a way to join forces, looking like startups while working like banks,” adds TechCrunch.
One solution to rule them all
Once traditional banks and fintechs are open to the idea of partnerships, the next logical step is a “platformification of banking, where both existing banks and startups begin a strategic shift towards becoming banking platforms, much like how Amazon is a platform in retail,” explains Ron Shevlin, Director of Research at Cornerstone Advisors.
Platformification is a merging of everybody’s strengths. Banks operate “as the core financial platform, responsible for many of the core transactions – but they would be directly linked to fintech enterprises,” explains Hans Tesselaar, executive director at Banking Industry Architecture Network. “The platform would essentially provide a one-stop shop for customers, from which they could access both the traditional bank’s services, alongside a host of innovative solutions, offered up by fintech alternatives.”
Platformification will eventually lead to better banking solutions in terms of cost, performance, speed and convenience, adds Shevlin.
Most experts believe there’s no going back for banks. “It’s plain to see that a perfect storm of competition, technology, shifts in customer behavior and regulation will wreak havoc on the businesses we trust with our money,” explains James Haycock, author of Bye Bye Banks? and managing director at Adaptive Lab. “It’s a matter of when, not if, banking is reinvented.”
While the strategies suggested to respond to this evolving environment vary, most forecast some form of collaboration between traditional banks and their non-bank competitors. Platformification best exemplifies the merging of both worlds and no doubt represents the way of the future. Question is, will banks go it alone in their quest to reinvent themselves or will they look for the “perfect mate” to complement their existing strengths?
By Enrique Garland, senior strategy manager at cxLoyalty