By Mark Grainger, VP Sales Europe at Engage Hub
2019 has been the year of disruption for the Financial Services (FS) sector, largely driven by evolving customer expectations and the influx of new technology. Increasing regulatory requirements, combined with new entrants in the market and shifting economic policies also continue to mould the industry. According to PwC, 15 new licences were issued in the last three years to a variety of cloud-based challenger banks. As these branchless banks take over market share, incumbent banks have realised the need to adapt to this change – whether to be a shaper of the future or a fast follower. Already, traditional banks have invested over 1 trillion US dollars in disruptive technologies over the last three years, looking to embrace agility and stay competitive. Simultaneously, around a third of the UK’s bank branches have shut within the past five years alone, as banks focus on making their operations digital.
2020 comes at a crucial time, with higher than ever before customer expectations, regulatory requirements and new competition. Bank branches will continue to diminish at an increasing rate, agile fintechs will continue to gain market share and the FS sector will continue to look for the perfect balance between regulatory compliance and customer experience.
The future of the bank branch
The closure of bank branches has been attributed by traditional banks to the shift towards online banking. According to RBS, in the last 5 years, the number of customers using their branches across the UK has fallen by 40% and mobile transactions have increased by 73% over the same period.
As customers continue to change the way they bank, incumbent banks will continue to change the way they serve them, investing in digital branches and re-shaping their network – replacing traditional bricks and mortar branches with alternative ways to bank. This move will not be as much of a leap as one may expect, as the face of a high street bank branch has already significantly changed over the years. The number of tellers has decreased, and the branch is now sprinkled with machines helping customers carry out their various tasks. The natural next step is for banks to introduce the functionality of these machines in the form of mobile apps, bringing banking directly to the smartphone of the customer.
Despite the shift to online banking, however, there will always be customers who prefer to do business in person, and banks need to ensure they don’t leave these customers behind. 78% of Generation Z consumers visit a physical bank branch at least monthly, the highest of any age group, according to a study by Adobe Analytics. Hence, it is imperative for banks to still take a cross channel approach – and not put all their eggs in the digital basket – to ensure these customers are not being left behind, and don’t become disillusioned by the closing branches.
The rise of challenger banks
Over the past year, so-called challenger banks and neo-banks have been making headlines by attracting big venture capital investments and poaching customers from traditional banks.
These newer, completely digital mobile outfits, don’t carry the weight of legacy technology, so they can leapfrog over traditional infrastructure and disrupt the status quo.
Traditional financial institutions aren’t asleep at the switch when it comes to these new kinds of banks. Mindful that most of their customers have no interest in visiting a bank branch, they have accelerated their adoption of digital technologies. Some legacy firms are also launching nimble digital banks of their own that could pose a threat to independent challenger startups. Earlier this year, Goldman Sachs debuted it’s online banks Marcus, and more than 50,000 Britons signed up in the first two weeks.
Although traditional banks still hold the largest market share, they may be at times disadvantaged owing to their reliance on legacy systems. Customers are now expecting fast and seamless service, requiring banks to take the same highly personalised and nimble approach that has led to the popularity of digital banks. However, the ageing and complicated web of legacy systems that form the IT infrastructure of banks today makes it increasingly difficult for them to transform their operations. For instance, customers can now open current accounts with neo-banks including Monzo and Revolut on their smartphones from the comfort of their own homes. Slick mobile apps take customers through the entire process, using a selfie taken on their smart phones as proof of ID. Unfortunately, this cannot be replicated by traditional banks, for the simple reason that legacy systems don’t accept jpg images, and the proof of ID would still need to be physically scanned and filed onto the system.
Aware of this gap, traditional banks are increasingly incorporating agile digital tools in all customer interactions. Earlier this year, Santander announced that it will funnel 20 billion Euros into digital transformation and information technology in the next four years, largely targeted toward improving customer experience.
The balance between customer experience and security
According to the Strong Customer Authentication (SCA) ruling under the second Payment Service Directive (PSD2), all merchants and banks need now require two methods of authentication for online transactions.
Additionally, last year, criminals stole £1.2 billion through fraud and scams. It’s clear that banks, who not only deal with sensitive customer data but also are responsible for safeguarding money, have a responsibility to take security seriously. However, at the same time it is important for banks to ensure introducing these additional security measures doesn’t affect customer experience (CX). After all, enhanced security often requires customers to jump through additional hoops. And the conventional CX wisdom is that journeys should be as simple as possible to keep customers happy.
In 2020, banks will need to make sure this additional layer of security – whether through a one-time passcode or using biometrics – is easy to execute without device-hopping, and with an easy way to access customer service if needed.
Extra authentication is becoming the norm, and as long as it’s seamlessly integrated into their customer journey, customers will be happy to put up with the added friction if it prevents issues. And by showcasing a pre-emptive approach to customer service, financial services organisations will be rewarded in the long run.
With so many changes to the sector coming so fast, it can be hard to grasp the sheer scale of innovation underway. Whatever happens, 2020 will be an interesting year for traditional and new banks alike, as both focus on retaining market share and ensuring a holistic, secure and largely digital experience for their customers.
Three times as many SMEs are satisfied than dissatisfied with COVID-19 support from their bank or building society
- More SMEs are satisfied (38%) than dissatisfied (13%) with their COVID-19 banking support
- Decline in SMEs using personal current accounts for business banking as more seek access to the Government-backed lending scheme
- Fewer SMEs believe nearby branches are important when choosing a bank or building society
- 15% of SMEs use mobile or online banking more often than before the COVID-19 pandemic
- When SMEs do look to switch, low or no charges for business banking remains the most important factor (47%) in selecting a new account
Three times as many SMEs have been satisfied than dissatisfied with the COVID-19 support available from their bank or building society, according to YouGov research commissioned by the Current Account Switch Service.
Overall, four in ten SMEs (38%) were satisfied with the support they received from their business current account provider since the pandemic began. This contrasts with one in ten SMEs (13%) who were dissatisfied. In general, more than half of SMEs (55%) are satisfied with their current business bank account, compared to 8% who are dissatisfied. However, inertia remains a problem as half of SMEs (50%) said they would not look to switch business accounts even if they were dissatisfied with their current bank or building society.
When SMEs do look to switch, low or no charges for business banking remains the most important factor (47%) in selecting a new account. Advanced digital features (35%), good interest rates (34%), and a personal connection through a relationship manager (33%) also mattered.
The SME banking research was conducted both in February and in September 2020. It also reveals that since the start of the pandemic, the proportion of SMEs using business current accounts has increased from 69% in February to 74% in September as firms are required to have a business account to receive access to the Government-backed lending schemes.
However, one in five SMEs (20%) still use a personal current account for their business banking needs, despite the risk that tax liabilities get confused, and calculations are made incorrectly. These businesses are also missing out on a range of business-only banking benefits such as integrated accounting software or invoicing tools offered by different providers.
In addition, the research shows the importance of branches to SMEs has declined over the seven months. When asked in February, more than a fifth of SMEs (22%) said the availability of nearby bank branches was important when selecting their bank or building society, compared to 17% in September. However, the Post Office could be fulfilling the role of branches in some areas.
The declining importance of nearby branches was most noticeable in the North East region where 35% of SMEs believed branches were important in February, falling to 18% in September. The importance of nearby branches also varies between industries. One in ten IT companies (11%) said nearby branches were an important factor compared to nearly three in ten (29%) leisure and hospitality businesses.
While branches are less important, digital banking use has increased for some SMEs. Several firms have started to use online banking for the first time as 15% of SMEs say they use mobile or online banking more often than before the social distancing measures were introduced.
Maha El Dimachki, Chief Payments Officer of Pay.UK, owner and operator of the Current Account Switch Service, said: “Across the country, banks and building societies have been working hard in difficult circumstances to meet customer needs. Thanks to that work, small and medium-sized enterprises are more likely to say they are satisfied than dissatisfied with the support they received from their business account provider since the pandemic started. But lockdown has changed small business behaviour dramatically, in a way that points to significant changes to their banking needs both now and in future.
“It’s encouraging to see many small businesses are generally satisfied with their business bank accounts. However, even when businesses are unhappy with their bank, some don’t consider switching as an option, despite the many benefits available. We’ll continue to raise awareness of the benefits of switching among small businesses to help them get the most from their bank account.”
The Next Evolution in Banking
By Young Pham, Chief Strategy Officer at CI&T
Everything we know about banking is about to change. A new industry around the sharing of financial data is primed to give birth to a host of new consumer services, all thanks to Application Programming Interface (API) technology. Already known for being the safest place for money, there are opportunities for banks to expand that relationship to other aspects of the customer relationship. Banks will no longer simply be just a place to deposit and withdraw your cash, but a one-stop-shop for a range of data-sensitive services.
The passing of GDPR and the Payment Services Directive (PSD2) were the first steps in this process of banks modernising how they handled their customer data. However, incumbent institutions have so far not engaged enthusiastically. Rather, it was only after growing pressure from fintech challengers and government regulation that they were forced to open up and share their data. This should not be treated as a regulatory challenge, but rather a way to grasp the unique opportunities that banks have to reposition themselves as the most trusted resource for their customers.
It is hard to overestimate the breadth of possibilities arising from open banking, should banks choose to take advantage of this evolution. While the public rarely holds bankers in high regard, it still puts a high level of trust in banking institutions. People are more willing to hand over their sensitive data than they would be to almost any other private entity. Furthermore, banks have a unique perspective into their customers’ behaviours, needs and desires. Spending habits, income streams and risk appetites are just a few examples of the data that no other institution can tap in to.
There is certainly appetite to expand offerings. In our recent study of business banking customers, over 68% of respondents indicated that they were open to their financial institution providing digital non-banking services. This includes services such as tax support, managing payroll, or invoicing to help them with their day-to-day businesses.
More banks should consider how open banking can maximise their digital capabilities and create a greater range of services for customers to enjoy. Such offerings could be tailored according to each bank and their particular customer audience. For instance, banks could offer everyday services for most users, such as insurance for individuals or business management tools for business accounts. Alternatively, banks could offer more exclusive and specialised services for high net worth individuals to meet their specific needs, such as art appraisal and investment management.
The idea that a firm can expand its offering into new verticals is hardly new. Many of the world’s largest tech companies, such as Apple and Amazon, already offer diverse products including hardware, software, entertainment and cloud services. They are able to do this thanks to the vast quantities of data they have gathered, which provide invaluable insights into consumer behaviour and demand. Banks are in prime position to follow the example of these top tier tech companies thanks to their monopoly on key financial data.
Disruptors vs incumbents
The business model described above is already being adopted by numerous challenger banks. These firms have led the innovative charge thus far, thanks largely to their agility afforded by their smaller size. Indeed, some fintech banks already provide a range of non-banking services to their customers. Revolut, for instance, offers users several types of travel insurance as well as access to airport lounges as part of its premium service for a monthly subscription.
These offerings are not a sign that the challenger banks are about to topple the large incumbents. Rather, these disruptors have always flagged the gaps in the market that larger institutions have been too slow to fill. It is now up to the established banks to learn from their example.
While challenger banks may have a first-mover advantage for these services, the incumbents have two key advantages: capital and credibility. Firstly, the top banks have enough cash to fund this overhaul of their business models. While the challengers have been able to afford to do so in recent years, they lack the reserves to tide them over during economic downturns such as the current pandemic.
Secondly, even though challenger banks are perceived as more convenient and are less vilified than traditional banks, the public still trusts the latter. Many of these large banks can point to their extended histories and long-term investment success – accolades young challengers simply cannot match. In short, people don’t have to like their bank to trust them with their cash and their data. These two advantages strongly suggest that large banks are better positioned to take advantage of the open banking business model in the long term, despite being slower to adopt and adapt.
All this opportunity is within reach. We already have the technical capabilities for data sharing, and the regulatory framework is not insurmountable. Rather, the key for this evolution of the sector lies in banks’ appetite for risk and willingness to reinvent their business model.
Banks need to take a leap of faith and leave behind the business paradigm to which they’ve become accustomed. They should embrace transparency, run towards regulation and take advantage of opportunities to invest in these areas or collaborate with outside technology firms. Only then will banks be able to make the most of their data assets, creating value for the customer and further strengthening the relationship.
Banks talk a good game, but are bankrupt when it comes to change and innovation
By Erich Gerber, SVP EMEA & APJ, TIBCO Software
You hear all the time about the incredible pace of change in technology and the way that it affects business, but sometimes we kid ourselves about the real speed of that change and the depth of its effects. Retail banking is a perfect example to illustrate the yawning chasm between the illusion and the less attractive reality. In this article, I want to provide a critique of the banking sector and its failure to change fundamentally and to modernise.
Banking is an old sector: the Banca Monte dei Paschi di Siena has its roots in the 15th century and the oldest UK banks go back to the 17th century. We often talk about legacy holding companies back, restricting their speed of operations and hampering their ability to adapt. Well, established banks have legacy in spades.
They also have cultural challenges. The old saying has it that something is “safe as the Bank of England” and that is a standard for security. But today we need banks to be more dynamic and represent something more than being a deposit box for our wealth. Consumers are accustomed to the superb customer experiences in entertainment (Spotify), devices (Apple), retail (Amazon), travel (Uber) and much else. Surveys show that they want their banks to be responsive, easy to use and available across multiple channels. They’d like banks to be secure but also to be advisors, enable flexible movement of assets between accounts, provide useful data analytics, be cloud- and mobile-friendly and offer deals that are specifically targeted at their interests.
At their core, banks now must become digital enterprises but, frankly, it has been slow going. As Deloitte observed: “While many banks are experimenting with digital, most have yet to make consistent, sustained and bold moves toward thorough, technology-enabled transformation.”
We all know that retail banking has changed significantly: you can see that in the proliferation of apps and the fact that, in pre-pandemic times, the morning and evening commute are peak times for transactions as people arrange their finances while sitting in trains, buses and subways. Banking has become a virtual, often mobile business, thanks to new tech-literate consumers pushing banks in that direction. But my fear is that the banks aren’t moving even nearly fast enough and that’s bad for us as consumers and bad for the banks themselves.
Banks are under pressure to change because challengers don’t have the legacy constraints of incumbents and because PSD2 and open banking regulations are having the intended effect of promoting banking as a service, delivering transparency and greater competition.
Attend any business technology conference and banks will talk about their digital transformations and customer experience breakthroughs, but it’s my contention that a lot of this work is more window-dressing than platform building. Or, to put it another way, banks are injecting Botox, rather than undergoing the open-heart surgery that they really need. It’s a case of ‘look: fluffy kittens and shiny baubles’ in the form of apps and websites, but the underlying platforms remain old and creaking and that means that the banking incumbents are hampered.
To be fair, I have lots of sympathy here. They simply can’t move as fast as the challenger banks that have had the luxury of starting their infrastructure from scratch and sooner or later that will come back and bite them. Look, for example, at cloud platforms where only 10 or 20 percent of infrastructure has been migrated despite promises of cloud-first strategies and the banking data centres where monolithic on-prem hardware still reigns.
You feel that slowness of action in your interactions with banks that communicate only via issued statements, letters notifying you of changes to Ts and Cs, and threats when you go into the red. Inertia is nothing new in banking either: we like to think that technology change happens in the blink of an eye but in banking contactless NFC took the best part of 20 years to go mainstream.
This is the dirty secret of banks. They see the need to change but remain shackled. Why are the banks so slow? Historically, because it was hard for competitors to gain banking licences and the capital to really challenge so there was no catalyst or mandate for change. Also, because change is tough and fear of downtime or a security compromise to critical systems is very real. More recently, because internal wars in organisations set roundheads against cavaliers, the risk-averse against the bold, resulting in impasse and frustration.
I said change is tough and that’s why banks need to power through on the basis of Winston Churchill’s wisdom that ‘if you’re going through hell, keep going.” How? By a combination of maniacal focus on expunging legacy systems, placing maximum emphasis on superb customer interaction experiences and digitally enabling anything that moves.
Right now, the banks are surviving, not thriving; they’re rabbits blinking into the headlights of approaching traffic, frozen in the moment. But they need to disrupt themselves before others do it to them: change is painful but not as painful as the alternative. They have to do much more or they will see a decline in their fortunes due to their bankrupt capacity for innovation and their inflexible infrastructures.
Motivate Your Management Team
A management team, typically a group of people at the top level of management in an organization, is a team...
The Income Approach Vs Real Estate Valuation
The Income approach is only one of three main classifications of methodologies, commonly referred to as valuation approaches. It’s particularly...
How To Create A Leadership Philosophy
A leadership philosophy describes an individual’s values, beliefs and principles that they use to guide a business or organization. Your...
How to Build an AI Strategy that Works
By Michael Chalmers, MD EMEA at Contino Six steps to boosting digital transformation through AI In the age of artificial...
Leumi UK appoints Guy Brocklehurst to property finance team as Relationship Manager
Multi-specialist bank announces the appointment of Guy Brocklehurst to its property finance team Guy Brocklehurst has joined London-based Leumi UK...
Three times as many SMEs are satisfied than dissatisfied with COVID-19 support from their bank or building society
More SMEs are satisfied (38%) than dissatisfied (13%) with their COVID-19 banking support Decline in SMEs using personal current accounts...
Tax administrations around the world were already going digital. The pandemic has only accelerated the trend.
By Emine Constantin, Global Head of Accoutning and Tax at TMF Group. Why do tax administrations choose to go digital?...
Time for financial institutions to Take Back Control of market data costs
By Yann Bloch, Vice President of Product Management at NeoXam Brexit may well be just around the corner, but it is...
An outlook on equities and bonds
By Rupert Thompson, Chief Investment Officer at Kingswood The equity market rally paused last week with global equities little changed...
Optimising tax reclaim through tech: What wealth managers need to know in trying times
By Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange This has been a year of trials: first, a global...