Author of Bye Bye Banks?, a book on banking disruption, James Haycock gives us his thoughts on how traditional banks can tackle the modern era.
Retail banks are under siege.
Every aspect of their business model is under attack from a battery of new companies free of the legacy that banks have to struggle with. Many commentators are suggesting banks could be facing a Kodak or Blockbuster moment, but I don’t think the banks are going to go anywhere soon, as long as they’re prepared to reinvent themselves from the ground up.
Banks aren’t alone in facing this change. Industries such as telcos, travel and media (to name just a few) have already experienced this sea of change.
‘I don’t think the banks are going to go anywhere soon, as long as they’re prepared to reinvent themselves from the ground up’
This wave has been driven by a number of key forces, including huge advances in technology, which creates new opportunities but also massively reduces the cost and ease of entry; shifts in consumer behaviour that see people using their phone for everything; renting rather than buying and, generally, raising expectations from a customer-experience perspective; and, finally, a massive change in the competitive landscape.
Beyond these drivers, banks are also experiencing regulatory change. One change in regulation a couple of years ago lowered the barrier-to-entry for new banks. The second, which banks will have to comply with from 2017, is going to require them to offer APIs, which I believe is going to have a significant impact on the banking sector.
As hinted at in the opening paragraph, I believe banks can bridge these issues, which I will come to, but before I do it might be worth doing a whistlestop tour of the ‘who’s who’ of fintech companies and how they’re challenging the traditional retail model as we know it.
P2P, or marketplace lenders as they’re now known, act as a marketplace connecting those with money to those seeking it. They claim smart risk profiling, opening up borrowers typically deemed as high risk by banks. They also leverage their lower operating costs to offer a better return to those investing.
Zopa, Funding Circle and Ratesetter are some of the highest-profile fintech companies in the UK with the former having lent more than £1bn.
Digital challenger banks
A series of digital banks are due to open their doors soon. Atom will be the first, while Mondo, Starling and a number of others will be following once they’ve obtained their banking licences. Some are offering a full set of financial products as a traditional bank would, while Mondo is just focusing on offering a current account and, by focusing, intends to offer the best.
Savings and investments
Nutmeg is the leading UK example of a company offering savings, investments and pensions through a modern web interface. Only four years old, the business is growing well while, in the US, Betterment and Wealthfront have similar models.
It’s still too early to comment on the true impact of digital wallets like Apple Pay, but they have the potential to displace a bank in the payment experience.
Venmo in the US is a P2P payments app now owned by PayPal, which is demonstrating significant growth. Facebook looks likely to enter this race as well by enabling payments in its messenger app.
Better banks through beta banks
This small number of examples clearly highlights that there’s a lot for banks to be worried about. Bearing in mind that this list barely scratches the surface of companies out there, with fintech funding growing from $1.644bn in 2010 to $9.887bn in 2014 (according to research by Accenture and CB Insights), it’s probably to be expected that bank CEOs are increasingly paying attention to this activity.
Of course, the banks are fully aware of all the change that is happening and are investing heavily to encourage innovation while also cutting their cost of operations. They face a number of challenges, though. Culture, legacy technology and processes and compliance to name just a few.
So what can the banks do to overcome these challenges? How can they survive with these fleet-footed, customer-centric, design-led organisations?
‘A beta bank is a new organisation designed from the bottom up to survive and operate in the world as we know it today’
I believe the answer is for them to start all over. A refresh and rethink. As I wrote about in my book, Bye Bye Banks?, I believe that, alongside the expensive digital transformations, the incubators and VC activity that banks are doing, they should also launch what I call a ‘beta bank’.
A beta bank is a new organisation designed from the bottom up to survive and operate in the world as we know it today, rather than a branch-centric world, or even a late ’90s internet world.
A beta bank has a distinct leadership, is headquartered in a different building and works much more like a start-up than a traditional bank. While a bank struggles to work in a customer-centric rather than product-centric way – and, likewise, in a lean and agile way – a beta bank is designed around this modern approach of working.
James Haycock, managing director, Adaptive Lab
|As the founder and MD of Adaptive Lab, a digital products and services agency, James Haycock has grown a team of problem solvers and product builders and, alongside them, works with forward-looking leaders to tackle disruptive problems at some of the world’s largest corporations across sectors including finance, telecoms, retail and media. Since founding Adaptive Lab in 2009, James has become a regular commentator for trade and national press including The Sunday Times, The Guardian, Global Banking and Finance Review and BBC Radio.|
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