There have been a lot of new entrants to the banking space in the past few years – how would you define non-traditional banks?
Many entrants to the market, such as Tesco and M&S are labelled as non traditional, but they have been offering other financial services for a long time. However, they have been historically very focussed in terms of the products and services offered – concentrating on insurance, credit cards and loans. We are now seeing those organisations extend the range of products that they offer, which shows that they are making a strategic decision to take greater ownership of their financial services business.
How about the shared services that we are seeing? The M&S banking service is powered by HSBC –is this a mutually beneficial arrangement?
If a non traditional player is looking to introduce core banking services then they will probably do so through partnering with an established bank or an experienced technology provider. We have seen this happen repeatedly with the likes of Tesco, Sainsbury’s and now M&S.
This is clearly a mutually beneficial model. Offering white label services enables banks to gain access to very specific market segments. With the M&S announcement for example, we are seeing HSBC increase their footprint in the market by reaching out to M&S customers. At the same time, M&S gains a banking arm without having to make a substantial investment of their own to launch new financial services products.
Emerging niche players such as O2, on the other hand, will forge their own path as they are directly targeting services that were once the sole domain of banks.
Speaking of O2 – in the payments space we have recently seen the company launch a mobile wallet – are companies like O2 looking to take a similar path to M&S?
The payments area is different, particularly in relation to the O2 announcement. Here we see a truly new player entering the market, offering a highly specialised and still relatively new service.
These players flourish around the development of new channels, particularly mobile, where they can leverage their existing infrastructure to add complimentary services to attract new customers. By exploiting this gap, they are eating into the traditional banking markets and disturbing the way that banks serve their customers.
The key to their success has been the customer-centric nature of their thinking, driving adoption by providing services that reflect how people want to use technology.
So if technology is key, are non traditional players able to roll out these new technologies faster than established banks?
Traditional banks do have a challenge in terms of their legacy infrastructure. It isn’t as simple as introducing a new channel, you also have to consider how customers want to use these channels, ensure there is relevance and consistency, and also how you are going to get products to the channel. This is where legacy systems can be a great hindrance to business agility.
Banks have a great deal invested in their core systems, and they are not going to go through wholesale change overnight. However, the emergence of new channels is forcing change and we are starting to see core modernisation becoming a priority across the globe with an emphasis on channel integration as well as proper risk mitigation. The challenge that banks face is to understand how their customers want to interact with the bank and provide products and services that reflect this new paradigm. This represents a significant shift in how banks have traditionally operated.
This is where analytics can really be of assistance to isolate market segments and help banks to assess emerging customer demand and how to address it.
You speak of assessing customer demand – do established banks have something to learn from non-traditional entrants in terms of customer service?
Retailers base their customer interactions on understanding exactly what the customer wants on an individual basis, and banks have been slow to adapt their services to that way of thinking. Non traditional players think about getting the customer to engage with them in a much more social and individual fashion, as opposed to viewing customers in a group sense – this is a big difference between the two different types of financial institutions.
The more progressive banks are coming more into line with this thinking, but it can be a struggle for most of the industry – where transactions are still about commerce and money movements, rather than personalised interactions. For example, if you want to send money to a friend to cover the cost of a meal, a traditional bank would view this as an account-to-account transaction, whereas many end consumers and non traditional banks would see it as more of a social payment – and want to leverage P2P payment services.
In a society where consumers expect to be at the centre of brand attention, this is where traditional banks have an opportunity to change their way of thinking.
What about customer trust in the light of the recent banking crisis? Did this encourage people to move away from established banks?
Trust has certainly been an issue, but I do believe that the majority of people still want to use an established name to provide them with a banking service.
It is now up to the banks to learn from non traditional players and adapt their services accordingly. Providing banks start to offer customer centric services and new self-service channels alongside their core banking products and services, I am sure banks will ultimately prevail.
Better use of the data that they hold around their customers, with deeper analytical capabilities will enable them to make truly informed decisions about particular requests or transactions, and truly bring them up to date with their new competitors.