With PSD2 and Open Banking coming into play, the call for banks to reinvent their business models has never been more urgent, says Paul Bowen, Banking Lead, Avanade Europe
In 1994, Bill Gates famously and controversially predicted that banks would be dethroned and displaced as technology propelled the world forward. “Banking is necessary. Banks are not”, he declared provocatively. But as the Second Payment Services Directive (PSD2) comes into effect at the start of 2018, what once seemed like a debateable statement to bankers is now ringing alarm bells.
The regulatory barriers that previously kept competitors at bay are fading. With the advent of PSD2 and Open Banking initiatives, banks will soon be competing with emerging fintech competitors as well as tech giants like Amazon, Facebook and Google, who seek to own either part or the entirety of the consumer journey. For instance, it isn’t difficult to imagine such companies soon using Application Programme Interfaces (APIs) creatively to combine services from different vendors and markets, to develop an app that offers helpful financial recommendations, payment services, products and support services in a tailored way.
As a result, banks’ current channels are under threat and their revenues are at risk. Estimates for the loss of market share to new payment initiation service providers are high as 33% for online debit card transactions by 2020.
To remain relevant and outperform rising competition, the retail banking industry needs to innovate and fast – heeding the lessons of other sectors that have seen their core services toppled by digital transformation. Let’s not forget the case of Kodak clinging on to traditional film photography rather than recognising the immense value of digital – which they themselves invented. Kodak took its legacy product for granted and side-lined its new one. By resisting change and refusing to adapt to new trends and technology, the company soon struggled to compete with new, more agile competitors and so to retain its market position.
Banks will be in that same position if they don’t take action quickly. New technologies and business models will need to be explored in order to adapt and fight the oncoming waves of competition. A switch from a product-focused to a customer-centric model is needed, namely by focusing on technologies that will help banks interact with their customers in a more intuitive and seamless way. It will be vital for banks to focus their efforts in three main areas:
As consumer-tech organisations rapidly deliver innovation and improvements to customer experience, consumer expectations are being raised and they won’t hesitate to use new platforms better tailored to their needs. Indeed, 73% of millennials would be more excited by a financial services offering from the likes of Google, Amazon, Facebook, PayPal or Square, than from their own nationwide bank . It’s no longer about loyalty but about what works best for individual consumers, who will ask themselves: how smart can I be with my money?
More specifically, fintech companies like PayPal and TransferWise have already proved highly successful at breaking into the market, and the competition is extending to social media providers too. Facebook recently secured an e-payments license from the Central Bank of Ireland, indicating the ability to pay people through its Messenger app may soon be available in Europe. Meanwhile, Apple and Samsung Pay have further disrupted the payment space by enabling phone-based payments and removing the need for credit and debit cards.
To avoid losing more business to emerging competitors, banks need to offer a one-stop shop for customers, and enable them to manage their money in the most useful and convenient way possible. Banks should be transforming their apps to offer services like budgeting and forecasting, financing options, proactive alerts, automated virtual assistance and personalised suggestions.
2) Data driven learning and cognitive services
Analytics will be critical to creating a more personalised customer experience, attracting new customers and even increasing revenues – especially as 79% of consumers are willing to pay more for a better experience with their bank.
The good news is that right now, banks own a unique insight into their customers’ behaviour, which can be drawn from their wealth of data on customer spending habits and financial health. Banks should be exploiting these untapped data sources to pinpoint customer values and needs and help clients in a more tailored way. If they don’t, competitors are sure to take advantage of the lucrative opportunity as soon as they are able to.
Adopting cognitive computing solutions will be important too in helping create exceptional customer experiences. For example, by processing customer questions and learning their preferences, banks can predict opportunities and risks, as well as provide personalised services that become more targeted over time . Adopting suitable machine learning tools and cloud services will be key to achieving this.
3) API creation
For banks to implement these innovations and spur engagement with developers, a comprehensive API Management solution will be essential. The right solution will enable banks to launch new digital channels and apps, offer a seamless, unified experience across all channels and enable them to open up their resources to partners such as online banking marketplaces that compare products such as mortgage rates and ISAs.
To catalyse innovation in these areas, some banks are partnering with fintechs. For example, in May 2017, Barclays launched its flagship innovation hub called “Rise” in Shoreditch that will welcome approximately 2,000 innovators each month to connect and share knowledge. Meanwhile, RBS is encouraging API experimentation with third party developers via its BankofAPIs.com
But despite signs of change, IT in banking is still seen as monolithic. Banks carry a heritage of heavy IT architecture and are used to handling large amounts of legacy data that is not easily changed. To retain their market position, banks will need to start innovating and adopting these emerging technologies swiftly, because ultimately they will be working against the clock to make the leap to retain ownership customer journey.
By Paul Bowen, Banking Lead, Avanade Europe