Bjorn Cumps, PhD
Post-Doctoral Research Associate at the Vlerick Business School in Belgium
Vlerick Centre for Financial Services
Are you afraid of Google Bank? Or Apple Bank? Or maybe PayPal Bank? Well, I am not. And neither should traditional retail banks. And yet these kinds of thoughts continue to dominate panel discussions, research reports and opinion articles worldwide. At a recent Banking event in Brussels, organised by the Centre for Financial Services of the Vlerick Business School and KPMG, the results were presented of a study on the future of the Belgian banking industry. One of the topics discussed was the importance of “digital” in the future business model. The study revealed that customer centricity would be one of the key KPIs for banks in the coming years. And for sure, digital is an important enabler, right? Well, the discussion is not that simple.
The use of technology is on the rise in banks. New, technology-infused branch formats, social media presence, mobile banking, location-based banking services, Big Data technology, … these are just a few of the projects banks are all franticly working on at this moment. So we should be more specific when we talk about “technology” or “ICT” in financial services as each of the above mentioned examples is a “metier” on its own. But they do have something in common: none of these technologies will solve the banks’ problems. None of these are the silver bullets a lot of bankers are looking for. Banks are now in a phase where they are familiarizing themselves with these technologies. Which is good. But more is needed. More is needed to face the problem of flat net interest income for the coming years. More is needed to increase fee and commission income. More is needed to conquer the holy grail of customer intimacy and customer trust banks are all fighting for. Bankers need to step beyond the phase of familiarization or playing around and experimenting with these technologies. They need to tailor the technology to their core values or corporate DNA.
Today almost every bank has a Facebook or Twitter account. Great! Well, … no. Not that great as most of them use this either as an alternative for e-mail or postal services to keep us up-to-date on corporate news most clients are not interested in. Or they use it as an alternative call centre, mostly resolving minor issues to engage with the customer, which is already a next level of maturity, but still. In general, most social media engagement in banking is to be situated at the corporate brand level. Strange as a lot of study has already revealed that local brands enjoy more trust than corporate brands. A recent study in Belgium on trust discovered that customers trust their own banker twice as much as they trust banks in general. So local presence, proximity and a personal connection are key to that holy grail of trust and customer intimacy. To give one example, a proximity-focussed Belgian bank called Fintro by BNP Paribas Fortis has understood this well and pulled the level of engagement down to the local level by giving each local branch their own Facebook page to engage with their own customers. This makes it personal as the branch staff are the ones engaging with their known customers. Nothing special but already more than many other banks do. Social and local could go hand-in-hand on the path towards customer centricity. And this is just one example.
The lesson here, for every use of technology in banking, is to tailor the technology to your banks’ values, culture and strategy. There can be no winners if banks all keep using technology in a similar and standard way. At best this can lead to a better or different customer experience, which is much easier to obtain than true customer intimacy. When we talk about customer intimacy in banking we mean real engagement, personalized service, deep knowledge and understanding of their needs. Something where traditionally the personal touch of the branch employees makes the difference. Banking is a people business, right? Because in people we trust. People we know. But technology? The winners of tomorrow, the finders of the Holy Grail will be those banks that are able to blend and reinforce and boost their employees’ capabilities with technology. Not by giving 1000 branch employees all an iPad instead of a regular PC. All banks can copy this. Not by having a corporate Facebook account to interact in an impersonal way with frustrated customers.
All banks can copy this. Not by buying the latest Big Data software system to look for the hidden gold in your data. All banks can copy this. But by looking at your banks DNA, core values and capabilities you have built over all these years and reinforcing them with technology. If f.e. operational excellence and low-cost, no frills service is your game you could reinforce this with fast and straight through customer journeys on mobile devices. If you go the extra mile for your customers with a warm, personal touch then one possibility is to make sure you use their data to gain deep insights into their wants and needs on how to better serve them. A certain bank for example predicts when clients will need an overdraft giving their spending pattern and proactively offer it. If all you are interested in is selling products and do not care about your customer’s reaction, you could go ahead and sell their pooled spending habits data obtained from their accounts to third parties like a UK bank just started to do. It will certainly generate extra fee income from third parties but then do not expect your customers to like this. These are just a few examples to illustrate that banks are well on their way of incorporating technology in their business operations, yet not always aligned to their corporate DNA.
So, Banks. Are you afraid of Google Bank? Or Apple Bank? Or maybe PayPal Bank? Well, you shouldn’t be. Banks are embracing technology much faster than these technology companies are embracing banking activities. But banks have to do it in a tailored, blended way. Do you really think Google, Apple or PayPal want to become banks? Evaluating mortgage applications? Financing infrastructure projects? Doing IPOs? Managing a portfolio of funds? Managing clearing, settlement and custody activities? Yes, they have one big advantage: they have strong, trusted brands and are in the customers’ heart. And that is certainly an advantage with regards to customer intimacy. But tech companies do not have the banking expertise. Banks have a wealth of know-how, expertise and capabilities almost impossible to copy. And they should leverage and further strengthen these with new technology. Will tech companies become true banks? I do not think so. Will they cherry-pick on certain banking services such as payments? Most definitely! So that is the real battle-ground. But I for one welcome this move. Nothing better than good competition to keep the banks awake, on their feet, eyes on their customers and ready to innovate!
Bjorn Cumps, PhD
Post-Doctoral Research Associate at the Vlerick Business School in Belgium
Vlerick Centre for Financial Services
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.
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