Competition in the retail banking sector remains a hot topic of discussion amongst government, industry bodies and market participants alike, and it is no secret that traditional banks are not the only runners in the race. Although consumer trust in the banking industry is now widely reported to be on the rise following the financial crisis, new entrants to the banking sector have capitalised on consumer desire for simplicity and transparency, and proceeded aggressively with digital innovation. An Accenture report released at Davos this year – Remaking Customer Markets – anticipates that competition from non-banks could erode one third of traditional bank revenues by 2020.
Competition has long been viewed as the key to a functional and successful marketplace. Today however, as new players and technologies continue to enter and disrupt the market, we are seeing a new model emerge – ‘coopetition’, or ‘co-operative competition’.
You only need look at initiatives such as Zapp and Weve in the UK to see this pattern emerge. These fledgling brands are collaborating with industry giants to bring about change and real innovation in the space. Zapp is working with HSBC, First Direct, Nationwide, Santander and Metro Bank to provide its technology to the banks’ 18 million current account holders, while Weve (a joint venture between three UK telecoms operators) has paired up with Mastercard to drive contactless mobile payments in the UK.
What’s in it for me?
These collaborations bring significant value to both ‘little’ and ‘large’. Banks stand to benefit from the speed of innovation offered by fintech startups, helping them keep pace with rapidly evolving consumer expectations and demands in a digital age. Developing proprietary services in-house is extremely costly and time-consuming. This is particularly true of the design and development stage – ‘turning ideas into reality’. Banks are well aware they will struggle to match the agility and creativity of young and vibrant firms, and are now leaning into innovation from new players in the space to allow them to launch new services direct into the market.
For start-ups, building partnerships is the only viable route to quickly gaining significant market share. Although banks may struggle with the pace of innovation, they possess significant competitive advantage – large customer bases (Weve will enjoy the 22 million-strong opt-in customer base of the three major mobile network operators with a combined market share of 80 per cent), a great deal of customer and transaction data, and perhaps most importantly, the ability to enable secure payments.
Leading the way – a success story
In many industries, working with ‘the enemy’ would be frowned upon – few businesses can succeed whiles supporting their main competitors. However, the theory of coopetition has been truly embraced in Poland, with some impressive results.
Just under one year after the announcement that six banks would collaborate to build a common infrastructure to fast track mobile payment adoption in the country, Visa has confirmed that Poland is leading the way with mobile contactless payments in Europe – 158.7 million purchases in the last twelve months. Proving that collaboration needn’t translate to loss of individuality or competitive edge, each bank involved in the project – Alior Bank, Bank Millennium, Bank Zachodni WBK, BRE Bank, ING Bank and PKO Bank Polski – has differentiated itself by adding its own features to the banking platform.
Collaboration of this nature goes some way to combat one of the most commonly cited barriers to the adoption of mobile payment technology – the fragmented market. As banks, telcos, giant tech firms, start-ups, and even supermarkets push to take advantage of the mobile money opportunity, consumers are faced with a dazzling array of options. Although this variety is proof of a thriving market, confusion can lead to a lack of trust – the trust that lies at the very core of successful mass adoption of mobile payment technology. If consumers remain puzzled about where to turn, many will simply choose to stick to what they know best – cash and card.
You better shape up
The recent Vickers legislation which has introduced quick account-switching for the UK’s retail banking sector is no doubt focusing the minds of UK banks. The ability to move accounts in just seven days is designed to combat ‘legacy loyalty’, and put the power back in the hands of the account holder. Despite scepticism and assumption of customer apathy, statistics show that this regulation is indeed having an effect. The TNS Current Account Switching Index from October 2013 showed that the number of people switching since the rules were applied has increased by 8% – to 35% in Q4 2013 compared to just 27% in Q3.
The same research confirmed that poor customer service is the main trigger for leaving a provider – a headline that will not have gone unnoticed by the banks. As they look to steal customers from their competitors, they must focus their energies on competing strategically rather than trying to rebuild the wheel. The brave and innovative approach we have seen in Poland is about more than just claiming a slice of the payments pie – it’s an initiative to spur consumer confidence in new technologies.
I believe we are now looking at a new era of innovation in financial services. This won’t focus on short-term gain but take a longer-term, more sustainable, strategic view of the market. Bank collaboration may just be the final piece of the mobile payment puzzle.