Future Banks: Who will decide or lead this transformation?

It has to be agreed that banks with too much focus on risks and regulations has been slow innovators and failed to think out of box. With the advent of agile competitors like Google and Facebook, banks really felt the need for a customer centric transformation for sustainability in the financial marketplace. These large technology behemoths seemed to have caught banking institutions by surprise.  Their customer centric approach, ease of use technology products have won them a large customer base and so, it’s crucial for banks to move away from their traditional product centric approach to being more customer focussed and being more free towards technology adoption. Will either sides collaborate or compete each other to write a new chapter in banking innovation?

Threat indicators – where does this tale begin?

                                                                                      Never had anyone thought technology and social networking companies would be more than just enablers to businesses. Traditional banks were caught in regulations which limited them to think and innovate where these technology firms were at free will to innovate. They were tempted to foray into the financial world posing as a direct threat to the custodians of money because it was simply all about money. Therefore, one fundamental question keeps tickling. Will large technology firms like Google and Facebook be able to replace these age old banking institutions or will they co-exist?

Global meltdown was narrowly averted. Now comes the hard part: actually growing revenues in the face of tepid loan demand, low interest rates and new regulations. Consultants at KPMG say the key to pulling off that feat will rely in large part on beefing up banks’ technological prowess. “In our view, the next crisis could revolve around IT, given the value and volume of data that banks generate, the attraction of that data to cyber thieves and vandals, the complexity of banks’ IT systems, and banks’ utter reliance on those systems,” the firm says in a new banking-industry outlook report.

 Today very few of us would prefer to walk in to a bank to make a transaction or carry paper money in our wallets to pay at retail outlets. Instead would prefer to have transactions done online or through the use of plastic money. The pioneers and enablers of technology who had been helping banking institutions for centuries have themselves showed signs of entry into the banking world. In the next two to three years, it’s to be seen that only 5percent of the consumer interaction will happen through branches. Concepts that were once seen to change the face of banking have itself shown signs of demise when internet and telecommunications technologies have evolved, got cheaper and easily accessible.

New leagues of competitors are emerging free from banking burdens: obsolete systems, costly distribution networks, regulations. The growth of internet and accessible telecommunications has brought with it the death of branch banking which was once thought of revolutionizing banking itself. Those seen as niche businesses like PayPal, Square, iZettle, SumUp, Dwolla may soon expand or seek alliances. Alibaba, China’s equivalent to Amazon became a $16 billion lender in less than three years, and China’s largest seller of money market funds in only seven months.

These upstarts are gaining footing in the banking world with prepaid debit cards that customers can use to pay bills, make purchases and deposit checks via a Smartphone camera – all things that could be done with a traditional banking account. These firms such as T-Mobile, Wal-Mart, google and a host of others in the retail, tech and telecom world has the backing of a highly coveted group that traditional banks have struggled to attract – YOUNG PEOPLE. The threat indicators can be sensed in terms of these firms having an existing customer base, scale and the ability to adopt new technologies quickly.

 Payments which happen to be a source of up to one quarter of traditional bank revenues is one of the most contested areas. PayPal is now the number one online payment method in some countries and start ups like Square and Stripe are earning multi-billion dollar valuations. Retailers like Wal-Mart and Starbucks are also moving into this space with nearly one third of domestic Starbucks revenues are paid through its own loyalty cards. Walmart on the other hand has teamed up with American Express to launch a prepaid card that functions like a debit card; it captured more than a million customers in less than a year. Walmart recently launched a new service which it calls as ‘Walmart-2-Walmart Money Transfer Service’ that allows customers to transfer funds among the more than 4000 Walmart stores in the United States. If you would have had a glance of Walmart Money, you would find it to offer services such as Money Transfers, Bill Pay and Money Orders, Check Cashing, Pay with Cash, Coinstar, Protection and Tax services.

Are traditional banks living upto this challenge?

Survival is the key. To retain customers, banks need to turn customer centric, be in an advisory role and be available 24/7. Traditional banks need to cautiously formulate their strategy to respond to the new threat posed from a new group of retailers, telcos and tech firms. It’s interesting to find out what steps some of the banks take to mitigate this new threat. The global management consulting, technology services and outsourcing company Accenture estimates that 35 percent of banks' market share could be "up for grabs" by 2020 as customers shift to digital banking products.

Banks across the globe are trying hard to get themselves overcome this challenge caused by ‘disruptive innovation’ in banking. 'Disruptive Innovation' describes a process by which a product or service takes root initially at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors. “Clay Christensen is renowned for pointing out how incumbents routinely succumb to Disruption, even as they do everything they can to be more competitive. And while there is little to indicate that banking might be an exception to the rule, there’s still enough time for bankers to read, understand, and act on the handwriting on the wall.”

Credit Agricole, one of the largest retail banks in France has developed a platform called ‘CA Store’ for jointly creating and downloading banking applications. It has arranged to bring application creators together in a cooperative known as ‘Les Digiculteurs (“Digi-farmers”) and put them in touch with customers seeking innovative, high performance applications for their banking information. It’s interesting to have a view at: https://www.creditagricolestore.fr/

Another banker, BBVA believes banks like retailers should put their customers first. In line to this vision BBVA along with continuum has designed ‘The Bank of the Future’ an initiative believed to be customer centric in line with customer’s new habits and changing behaviours. This model for retail banking provides customers with the freedom to bank the way they want and is adaptable to markets across the globe. Combining virtual experiences with hands-on relationships, social networks and global standards with local adaptations, the new service model increases efficiency while providing the human guidance people need to make financial decisions. The service model is convenient, reduces costs and allows each customer to interact with the bank according to their individual needs, while increasing transparency between customer and bank. The model works in both developed and developing markets.

CaixaBank, Spain’s leading bank by market share has designed a multi-channel banking strategy which ensures optimal service accessibility via any device, as well as its success in harnessing technological advances to address customer requirements, enhance services and drive efficiency. Other standout innovations at CaixaBank include Wearable banking (financial applications for smartwatches which synchronises with your mobile phone and is worn on the wrist and Google Glass, Línea Abierta on Facebook (application that allows users to view their bank account information and perform transactions via the social network), Stocktactics (new online community where customers can share investment strategies and help them make decisions), Business Wall (new model for relations with business customers, based on web 2.0 systems and social networks) somewhat similar to Facebook Message wall allowing customers to communicate with CaixaBank consultants in a secure environment, and Transfi ( designed to help users share and split costs as well transfer money using person to person system (P2P) based on QR codes. Capital One Bank at one of its innovation labs in San Francisco is tasked with developing innovative digital products and “re-imagining the way customers interact with their money”. It will focus on building mobile apps, middleware and some big-data solutions using technologies like Hadoop and Spark to improve analytics. Capital One Labs website itself says ' THINK BANKS ARE BORING? We're changing that'. Banks themselves have felt they need to change, custom and adapt themselves to customer expectations.

Branches, once considered the core strengths of a bank have now lost its charm. St George Bank, an Australian bank has moved one step ahead and plans to decommission their online banking to become a ‘mobile only’ bank. They seem to be at the forefront of innovation amongst the Australian banks with customers having the privilege to use technologies such as biometric log-ins to their mobile banking, ibeacon technology and so on. The Australian Commonwealth Bank for instance is searching for genuine value in the technology as evident from the fact that it has used augmented reality in its property app which has turned it into more than just a technology gadget. It built a financial ecosystem by teaming up with the real estate sector and aims to offer clients fast and easy access to real-estate data when they are standing in front of a house. People can access information about the price of the house, its sales history, auction data, the suburb profile, the demographics of the environment, and so on. The app also contains the bank’s own client data – the affordability of the house for that customer, the number of repayments, the interest rate it can offer etc. The bank understands that buying a house is an emotional decision. Either you fall in love with it or you don’t. And when you do, the bank is there. Commonwealth Bank is trying to change the customer journey, reducing the number of “mortgage shoppers”. It is trying to lock-out competition by keeping the client close to the bank through partnering up with real estate experts to offer something of real value. This way we can also see that banks are extending their present ecosystem to compete with the emerging technology banks.

The run for supremacy has just begun with many banks and non banks setting up innovation labs for research and innovation - all have one objective to achieve - to build long lasting customer relationships. Customers today envisage a bank that's functional 24/7, multi-channel, highly mobile, ease to operate and which is much beyond traditional banking!