By Euan Davis, European Lead, Cognizant’s Center for the Future of Work
The European banking industry is under extreme pressure. Although the looming risk posed to financial stability by Brexit is perhaps the most notable risk, 2019 is looking like it will be a challenging year all round. To survive, simply ’doing’ digital is not enough. Managing constant change will require traditional banks to become resilient to its impact by embracing a customer-led strategy, evolving with market trends and intelligently piloting emerging technologies.
Looking inward to work more efficiently and provide a more streamlined customer experience, while keeping one eye on the external environment will be key. There are major threats snapping at the heels of industry leaders in the form of regulatory change, political upheaval and new competition. Although banks have been fighting them for years, these influences are set to come to a head in 2019, with the potential to diminish, displace, disintermediate or even destroy mainstays of the industry if they are not taken seriously.
Defending multiple fronts
The symbiosis between the few big banks that make up most of the EU market, and the fintech firms challenging them, is constantly changing. However, companies such as Nutmeg are making significant progress in providing customers with viable alternatives, not only for current accounts but more lucrative services such as wealth management and investment advice. Elsewhere, digital-orientated outfits are raising expectations for rapid customer experience and transparency with a newer, more agile breed of organisation that has been poaching market share for some time.
What are incumbent banks doing about it?
A recent report from Cognizant’s Center for the Future of Work, The New Banking Genome: Building the Resilient Bank of tomorrow, found that over half of digital-first challenger banks, as well as three out of every five fintech firms, feel confident that they can compete with the traditional banking institutions. However, the same report showed that only a third of incumbent banks are conscious of the threats that these new entrants pose.
The future is coming
Although some incumbents are perhaps unaware of the risks, most understand that their market share is being challenged. Despite this, the group remains confident they can maintain a competitive edge across their existing service areas. Where they believe they fall short is in the field of new technologies such as blockchain. And there is no smoke without fire; according to the research, 34% of fintechs are already using blockchain, compared to just 17% of incumbents. Although the jury is out on the impact of blockchain in the short term, completely neglecting its potential would be short-sighted for any bank.
Clearly, there is significant attention diverted towards these challengers with a financial heritage thanks to their familiarity with innovative technology. However, there are also players outside the financial start-up arena that are challenging the status quo. Technology giants such as Amazon, Google and Facebook have joined the fray, as demonstrated by initiatives such as Facebook Messenger Payments. In fact, the report highlighted that over a quarter of traditional banks predict these big tech firms will be their main competition within the next three years, rather than fintechs. Banks really are having to fight for survival on all fronts.
Re-invent with regulation
If a host of digital-first competitors was not enough, regulatory changes such as the Revised Payments Service Directive (PSD2) and Open Banking Reform are also contributing to the complex industry backdrop. Although start-ups are subject to this regulation, incumbents are arguably more concerned as the changes have greater potential to expose their technology, cultural and customer service shortcomings. In particular, the arrival of Open Banking has given third parties access to customer account data held by larger banks, prompting the evolution of an ‘open banking marketplace’ in which all participants can benefit equally.
Despite this, with data considered by many to be the new oil, over three quarters of banking executives surveyed agree that incumbents’ access to a high volume of customer data still gives them an advantage over fintechs and challengers. It will be crucial to make use of their experience and long-standing customer relationships to maintain this advantage. Banks must see new reforms as far more than another tick-box exercise of regulatory upheaval; rather, the start of a new dynamic in the industry and a catalyst to drive optimisation, innovation and transformation initiatives.
Make your bank resilient
If these factors are an indicator of the next decade, industry mainstays must take steps to redefine themselves as ‘resilient banks.’ To do this, they should embrace four key factors:
- Put customers at the heart of operating models: reframe data and processes around customers. Start by simplifying legacy systems and applying automation. Then prioritise investment in digital experience and data analytics
- Embrace the marketplace model: open banking is still in its infancy, but it has the potential to scale innovation. Explore the possibilities of white-labelling fintech services, partnering or even creating fintech incubators/accelerators
- Make culture the growth medium in your petri dish: a culture of innovation needs to come from the top and pivot a central strategic aim. Communicate this often, and encourage employee feedback on strategic initiatives
- Do not fall into blockchain oblivion: the ramifications of blockchain at nearly every stage of the banking value chain will be profound. Identify these potential risks, pilot and then build to remain resilient
Due to a range of factors, a new age has dawned for the European banking industry, with the barriers to entry drastically lower. However, by redefining their operating and business models with new technologies to cater to the new environment, they will be in a strong position to respond to geo-political change and fight off challengers. To protect market share, well-respected, established institutions must prepare for a battle on all fronts, or risk becoming casualties this year.