Digital Banking – Adapt or Be Left Behind

By Adrian Overall, CEO at CloudStratex 

The global banking industry is in the midst of a digital and technological revolution. Cash transactions are declining as consumers place more emphasis on online banking as a means to satisfy their increasing need for faster, frictionless shopping. Digital wallets for example, now account for 25 percent of UK payments, and are growing at twice the rate of cards, according to the latest Global Payments Trends report from J.P. Morgan

The impact on the traditional high-street banking model has been severe. In the UK, consumer organisation which? reported last year that banks and building societies were closing at a rate of around 55 each month since January 2015, with the brunt being felt by the “big four” banks – Royal Bank of Scotland Group, Barclays, HSBC and Lloyds Banking Group.

Furthermore, one of the main competitive advantages that the traditional European banking industry enjoyed was destroyed in January 2018, when the EU’s revised Payment Services Directive (PSD2) was implemented. This allowed a range of fintechs access to their payments infrastructure and customer data assets. Now a host of savvy challenger or “neobanks” such as Revolut, Monzo and N26, are snapping at the heels of traditional banks. Their aim is to revolutionise the financial services industry, by leveraging consumer data using AI and machine learning via a consumer-friendly value proposition that is mobile centric, easy to use and is typically free or low fee. Most importantly they are differentiating themselves from traditional banks and other challengers by offering only a few specialised products and services that are specifically targeted at specific customer groups.

Transforming traditional thinking

Adrian Overall

Traditional banks are keenly aware they have to re-evaluate and modernise their business strategies and offering, by placing greater emphasis on the utilisation of technology and digital. Their very survival depends on staying “relevant” by launching new products and services to meet the needs of their customers.

Transforming any business can be a slow and difficult process if not done correctly. Too often, large banks find themselves saddled with legacy tech, outdated infrastructures, and a corporate culture that realises it must embrace change but is not sure what the first steps that are needed to do so. Without the right support and advice this can take years.

Banks need to ensure that they have the right people in place who understand technology, its implementation and utilisation. Given that the world is undergoing a digital revolution, such skills and knowledge are in high demand, and all industries, not just banking, are seeing a shortage of digital talent. In the short-term, experienced contractors can help to kick-start change but ideally in the medium to long term, banks must nurture and repurpose talent from within. Key personnel should be given the opportunity to retrain and refocus their careers in order to become digital and technological trailblazers within their organisations.

The Greenfieldstratagem

Another solution is for banks to take a Greenfield approach and establish a new digital business to directly address the changes taking place in the marketplace and to address a specific customer need.

This is what 36 percent of retail banks are considering as central to their innovation strategy according to a report in July last year by the Economist Intelligence Unit (EIU), on behalf of Temenos. Modelled on the innovative and customer centric ethos of the new challengers, and unburdened by the regulatory landscape that has stifled innovation in traditional banking service provision, in effect they are a wholly separate entity from their parents, with little cross-over in terms of culture, staff, technology and target market.

The Greenfield option makes it a lot easier to adopt services based in the cloud if you are a Greenfield company. You aren’t carrying the legacy of the past, and so you don’t have to migrate anything in order to leverage these services. There are pitfalls though to be aware of. In an interview with management consulting firm Oliver Wyman, Mark Bailie, the soon to be, former CEO of the Royal Bank of Scotland’s (RBS) money app Bó, stated that “greenfield isn’t a cost-free strategy. It creates other issues, which we’ve got to learn to manage: we will have two tech stacks, and two brands. That has taken a lot of thinking through. ”When undertaking a Greenfield endeavour, a bank must ensure it has the right people in place both internally and externally to ensure that both businesses are unique in their core proposition, yet aligned in in their existing policies in order to co-exist over the long term.

Banks are not out for the count just yet…

Despite the impact of the financial crisis on the reputation of established banks, they have been around for a long time, and are still seen as being extremely resilient. The popular narrative is that nimble challengers have knocked banks “onto the ropes”, as a result of them being bloated, narrow minded and resistant to change. This may have once been the case, but they are aware of their predicament and investing large amounts of their resources into emerging technologies to fuel their own digital transformation initiatives. Once the traditional banks replace their legacy technologies and embrace a technological driven culture, powered by employees who understand the digital marketplace, it may well be that the challengers are placed on the backfoot.

It is interesting conundrum that challengers have been the catalyst of change in the banking industry and have stolen an early lead but may well become the victim of their own success as their techniques are emulated. Only time will tell.