Changing consumer demands are shaking up the financial services market and will force banks to change their business models
By Mohit Joshi, President and Head of FSBI, Infosys
Top CEOs of Global Banks have been openly suggesting that they need to think and act less like a traditional bank and much more like a technology company, rapidly innovating new financial products and services and delivering these seamlessly across devices to new-age digital consumers. Ralph Hamers — CEO of the Dutch bank ING — speaking in New York last year, said it well – “INGis moving beyond just being a bank. It isnow a technology company with a banking licence”.However, ING isn’t the only bank thinking along these lines. In March 2018, JPMorgan Chase announced that it was in talks with Amazon to offer digital-only current accounts.
The market’s rapid move to an open-banking model is often presented as being a case of banks vs. fintechs. This is only partly true. Many established banks are already a long way down the road to digital transformation. The real dichotomy is between those financial-service players which are preparing for digital transformation and those which are still sitting on the fence.
Nor, in this scenario, is digital transformation an abstract phenomenon. It is driven by the changing preferences of increasingly connected consumers who want their bank to be as flexible, modular and accessible as all of the other digital services they use.
Millennialsare the first generation to grow up connected. The oldest millennial hit adolescence as the Internet was taking off in earnest. The youngest has probably never lived in a home that wasn’t equipped with broadband and Wi-Fi.
And that matters. Because the priorities and tastes of ‘digital native’ consumers are reshaping the market for financial services. In a recent survey, the majority of millennials used online and mobile banking; 58% said they thought it was reasonable to ask friends to repay small debts using peer-to-peer money transfer services (used by over 60% of millennials), rather than in cash; and over half used third-party money transfer services to pay their bills.
When technology meets consumer demands
In March 2018, the UK challenger bank Monzo had half a million current accounts, just half a year after it began offering current accounts to its customers. At the time of going to press, it looks poised to raise over $150 million in funding. And while it’s the biggest digital-only challenger bank, Monzo is not the only one. Tandem has over 21,000 accounts and Atom around 17,000.
Nor is it hard to see why customers are increasingly flocking to these digital-only challengers. Atom Bank allows customers to take out a mortgage using a mobile app. The Monzo app allows customers to view the last fifty months of transactions from their phone, and to freeze and unfreeze their account if they can’t find their mobile. Starling Bank even became the first UK bank to launch its own APIs, allowing developers to create Starling-compatible apps and offer value-add services to its customers.
These challenger banks are responding to clear signals from the market. According to a 2018 study by Oracle, most consumers in the 20-52 age bracket now prefer to open a bank account digitally and 69% of all consumers want their entire financial portfolio to be digitally accessible. Customers, particularly younger customers, want finance to work in the same way other digital services they subscribe to. It should be on-demand — available round the clock with no waiting for transactions to be completed end of day or waiting for a batch cycle to run. It should be easy to use and accessible from any device.
Over the last five years, technology has shaken the financial world to its foundations. With better systems, we can now process individual payments instantly rather than in batches overnight. This has hugely accelerated the payments market. The fintech sector has capitalised on technological advances that allow it to cut operating costs and offer better tailored products based on a more detailed and precise evaluation of risk.
Now that the Revised Payment Service Directive (PSD2) has come into force, notwithstanding a few remaining niggles about the Regulatory Technical Standards, Europe (including the UK) is well on the way to developing a truly open-banking environment.
This promises, once other banks get around to following Starling’s lead, to shake things up even more. With access to customer accounts and data, with proper customer consent (see boxout), financial-services companies and fintechs in particular will be able to offer customers better deals than ever before, potentially undercutting both the banks’ prices and their previously closed business models.
|India, interestingly, is preparing to completely reverse the data consent equation by embracing the Data Empowerment & Protection Architecture (DEPA) and India Stack. Faced with the unique challenges of managing and maximising the value of data in the world’s biggest democracy, Indian developers have started work on the world’s largest set of open APIs and the India Stack.
A key element of India Stack is DEPA’s so-called consent layer. Rather than specifying how their data may be used by each provider, users configure their data sharing settings once. All the companies using the India Stack then know how they may use each piece of that customer data. This gives the customers peace of mind and control on their data by switching from permission driven data protection to consent driven data privilege offered to businesses.
How are incumbent banks responding?
To find out what impact changing customer attitudes and demands are having on the financial services sector, and what banks are doing to adapt, technology services provider Infosys surveyed over 1,000 senior executives at international companies with revenues of more than $1billion.
In its research, Infosys was interested to see how the market — including both established and digital-only banks — was responding to the challenge posed by the shake-up caused by changing consumer expectations. Banks, we found, could broadly be divided into three categories:
- Visionaries: around 22% of respondents fell in into this category. They understand the potential of the digital revolution, can identify opportunities and change business models to seize those opportunities.
- Explorers: committed to enhancing the customer experience, this group identifies low-hanging fruit for digitisation and responds to specific customer demands but does not change business models. Explorers made up around 50% of respondents.
- Watchers: accounting for 22% of respondents, watchers see digitisation as a way to improve the efficiency of existing operations. They are less likely to think of customer experience or digital-led differentiation.
Why have banks responded differently to the challenges of their changing environment? It wasn’t, we found, because executives didn’t understand the scale of the challenge with which they are faced. Over fifty percent of respondents in all three categories classed the level of digital disruption in the industry as either ‘high’ or ‘very high’.
Interestingly, most visionaries (82%) and explorers (53%) said they planned to work with external partners, such as consultants and technology providers, to accelerate their digital transformation. Only 36% of watchers said the same. Similarly, 80% of visionaries said they would be working with external partners to break down barriers to modernising their business model. 66% of explorers were also open to working with transformation partners. But only 44% of watchers said the same.
This search for partners has led some banks to start acquiring promising fintechs. In April 2018, Goldman Sachs’ consumer banking division Marcus bought the finance-management app Clarity Money. In August of this year, Deutsche Bank took a minority stake in the payments fintech ModoPayment. Then in October, it was reported that Czech bank Moneta wasset to acquire the fintech Home Credit (HC) for €767 million.
But acquisition isn’t the only response to the rising challenge of fintech. Other banks are actively seeking partnerships with fintechs. Commerzbank, for instance, is working with start-up IDnow to provide intelligent customer authentication to its e-banking customers. In September this year, the National Bank of Canada even partnered with online lender Thinking Capital to help the national bank better serve small businesses.
This lack of openness begins to get to the crux of the difference between financial digital leaders and those who are struggling to adapt to a new reality. Visionaries had, in general, a broader and deeper view of what digital transformation meant and what it could achieve. They were significantly more likely than other categories to be engaging with emerging technologies such as Blockchain and artificial intelligence (AI). They were also more likely to rank digital-first qualities such as design-thinking capabilities, excellence in programme management and knowledge of emerging technologies (80% of visionaries said these were critical to digital transformation, compared to 60% of explorers and 80% of watchers).
What does this mean for the industry?
Traditional Banks and Financial Services companies in general need to evolve faster than before as the window of non-relevance is closing in, faster than ever before. As the Infosys survey discussed earlier suggests, the time to assume a Visionary position by moving up the digital value chain from Explorers or Watchers, is now.
Thankfully, the industry at large and the partner eco-system can help. With the right strategy, backed by good execution, Visionary banks can embrace a host of new-age capabilities that can help create a network effect of change, whether it be Accelerating their Cloud Journey, innovating new business models with Blockchain or enabling new Marketplaces with Open banking, Predicting Consumer behaviour through Insight & Analytics, offering secure banking by Assuring against Cyber threats, and underpinning all of this with best in class Customer Experience.
To start moving in this direction and creating that network effect, Banks should leverage Financial Technology Partners of scale who are also in the Visionary category with the depth and breadth of capabilities that extend across Strategy & Consulting, Design, IP/Platforms, Agile Learning, Proximity to skilled Talent and Automation/AI capabilities, all in equal measure.
To find out more about digital disruption in the finance industry, download the Infosys report “The New Champions of Digital Disruption: Incumbent Organizations” here