Never before have customers interacted with their banks so often, with account management but a touch of a thumb away. But what are banks doing with all the data they have collected, and what does it mean for me and you?
There’s no industry more susceptible to disruption than banking. In the space of 60 years we’ve gone from tangible, suit-and-tie meetings in stuffy banks to credit cards, debit cards and ATMs on every street corner.
The internet initially brought account management, loan approval, mortgage applications and new customers all online. Now we have apps, electronic billing and stock market management to the thousandths of a second – the mobile age heralding an on-demand culture, everything in real-time.
In the past 15 years alone we’ve seen bank branches swell up onto almost every main road, often with rivals pitched up next door, before a vast reduction of real estate and a retrenchment from front-of-house sales.
A global financial crisis did its best to gut the trust we have in established, ‘respected’ banks and, although it didn’t send the masses away from traditional banking, it opened the door for an eclectic range of new competitors – from global telecoms giants to tiny, clever, nimble one-hit wonders.
Traditional banks are supported by seven key pillars. Together, they create a longstanding revenue model but, when looked at separately, each is susceptible to industrial stresses. Three of these pillars are purely structural: staffing, real estate and online presence. The other four are more directly involved in revenue generation: savings, foreign exchange, payments and lending.
What we’re seeing today is attacks on each of these pillars, and banks are right to be worried.
Canny customers hard to keep
The current banking ecosystem is predicated on volume. Massive numbers of customers is the goal as, on average, traditional banking revenues are generated on scale. At the moment banks are facing the ocean, standing on a cliff, waiting for the ground to shift beneath them.
The ground in question isn’t services or competitors in this case, it’s customers. And customers are evolving, fast. A recent report in the UK found the number of bank customers changing provider jumped 9pc in 2014, and it’s fair to assume that figure will keep rising. In a survey of 3,000 US bank customers last year almost one quarter intimated they want to change. That’s an attrition rate that should worry any business based on core support.
This flaky customer attitude came about because the traditional barriers that stopped people changing banks are all but gone. Now you can open up accounts online or over the phone, rather than in-store. You can switch current accounts, savings accounts or even mortgages with relative ease.
The simplified access to information on where best to store salaries and handle bills means a previously solid, sluggish userbase is willing to switch banks at the swipe of a phone screen. This, according to David Tighe, Bank of Ireland’s head of innovation, is due to the rise of the ‘digital native’.
“We’re now faced with how younger audiences interact with mobile and what they want in the future,” he said. “This, along with technological shifts like blockchain and payments alternatives, are two challenges.”
Ultimately, today’s consumer is a bit of a mix. There are people for whom the internet is but a late importer in their life, others that have adapted accordingly, and then the ‘natives’ who know no other way. “What customers want, quite simply, is easy and quick services that provide value,” said Tighe. “If you don’t meet their needs, regardless of the industry, they’ll just walk away.”
However, they’re not walking away from banks entirely. A recent look at the financial ecosystem by Citi reported just 1pc of North American consumer banking revenue has left the system entirely. This is despite all of the investment into non-traditional financial companies, and continuous speculation about banks facing extinction.
Bricks and mortar no more?
Banks are pulling back from the front line, removing branches as fast as they can in heavily digitised economies like Europe and North America. Citi found that Nordic banks have dropped from the peak amount of branches in 2008 to about 50pc now. That’s mainly because for a large bank, spread over considerable terrain, an estimated 65pc of its entire cost base is taken up by branches and branch staff.
Anthony Jenkins, former CEO of Barclays, recently said he expected the number of branches and people employed in the financial services sector to decline by around 20pc in the next decade, on a conservative estimate. This is largely because the average number of interactions we have with a bank each month is 17. Only two of those are in store.
Branches aren’t dead, though. In emerging economies – or even acute localities in mature economies – branch openings could continue. Mairead Jackson, MD at Accenture, notes that RBS’s busiest branch in the UK is at a train station in London, for example. The beauty of mass distribution is the likelihood you hold a few gems in your armoury.
Those branches that remain need to be rethought, with certain in-store bank staff now shifting into a more advisory position. “My parents do most of their banking online, but their branch trained them in,” Jackson said, “‘Digital Arrows’ came around to help them understand.”
Training your customers is a seemingly rare example of a proactive engagement policy by a bank with its customers that makes complete sense. Other shifts like customer care staff operating in a 24/7 capacity, or opening hours of remaining branches stretching beyond the 5pm impossibility for office workers, could all help.
“In relation to our branches, like in Grand Canal in Dublin, they are being used in different ways,” said Tighe of Bank of Ireland. “The types of services our customers need from our branches are changing. We’ve provided a space here, for example, for start-ups that are very much around that area.”
Banks’ staffing concerns are going to grow remarkably quickly. At the moment, a marrying of old-world structures – with IT staff operating on both antiquated operating systems and cutting edge applications – makes for a confused labour force.
With branches closing down, front-line staff will go. With branches changing, the remaining staff will need to alter their skillset, with the help of their employer. All the while an army of software experts will be amassed behind the scenes.
If 15 of your 17 monthly interactions with banks are online (largely mobile), then there needs to be significant investment in upkeep of websites and apps. That puts banks in direct competition with the likes of Facebook, Google, Apple and a plethora of exciting start-ups when seeking out the best developers.
Do they have the money to pay for the best around? Definitely. Do they have the pull? Perhaps not.
‘I’ve never met a developer that was so proud to join a bank as a developer’
VALENTIN STALF, NUMBER26
“From a talent perspective I would disagree that banks have the power,” said Valentin Stalf, CEO of Number26, one of the growing number of digital banks out there. “They have money to pour into talent but the banks’ challenge is the best minds are not working with them.”
Stalf thinks many developers are not keen on working on technology which he describes as “out of the 1980s or 1990s”, with staff there merely “maintaining networks”.
“I’ve never met a developer that was so proud to join a bank as a developer,” he said.
This is a problem that banks were inevitably going to face once the world went digital. They are in competition with tech companies which have made a name for themselves as fun places to work, where staff are encouraged to innovate and challenge – what can corporate, bureaucratic banks do?
Quite a few things, it turns out. Though the number of competitors is ever rising.
Banks’ revenue streams are getting attacked from every angle. Accenture predicts 80pc of banks’ entire revenue-generating business will be encroached upon by the end of the decade, and evidence of this all around.
The ease with which banks are being targeted is quite shocking, but very explainable. There is now a conveyor belt of start-ups emerging that are focused on one service, one tool. Small workforces, front-loading their product into consumers’ pockets, adding an attractive veneer of UX to our otherwise turgid banking experience.
According to Kathleen Boyle, managing editor with Citi GPS, fintech investment has grown exponentially this decade from $1.8bn in 2010 to $19bn last year. Interestingly, over 70pc of this has been concentrated on the ‘last mile’ of user experience in the consumer space.
“The majority of this investment has also been concentrated in the payments area and this is where banks are seeing the most competition with new entrants,” she said, citing the likes of PayPal as primary examples.
Elsewhere there are products like Google Wallet and Apply Pay – two eye-catching names from the biggest tech brands in the world – but it’s beneath the starry gaze of mainstream media coverage where the really cool stuff is happening.
Take iZettle, for example, a growing Swedish start-up that found one niche in the payments industry back in 2010, and is busy driving open a second one now. When it first started, iZettle provided payment options for small businesses in Europe and South America, small businesses which had “been forgotten” by the mainstream banking industry.
“They were underserved,” said Johan Bendz, CMO of the company, claiming the landscape in 2010 was an odd one. “[Back then] there was no viable, economic alternatives for small businesses. To work with a bank was too cumbersome, loads of paperwork – apply, attend meetings, starting up costs, monthly costs, transaction costs, loads of administration. It just didn’t fully make financial sense if you were a small business.”
iZettle is a payment product for small businesses which costs them per transaction, nothing else. It proved so popular that the company has now reached 275 employees and, through a bit of clever thinking, is entering the lending world now, too.
Using the data it derives from its clients – detailed transaction history showing peaks and troughs – iZettle allows customers borrow money based on their business performance. It could be a nominal sum, it could be a large sum, but it’s always the same, simple process.
Making the data do the work
“We have the data, we make it work for us and our clients,” said Bendz.“Repayments are again only through transactions, automatically deducted. Once again, less administration. Less meetings. No paperwork, no manual work. It’s all automatic. We have the data, why not use it?”
iZettle has partnered with Apple Pay in some markets, noting the maturity level in the UK ecosystem as far ahead of many other countries with regards contactless payments. “The UK is a vital part of the number of contactless payments. In other countries it’s almost non-existent, but we believe this will be a big thing,” said Bendz.
You can see how, when an idea like that comes along, established banks are facing a bit of a problem. Using a banking system that has historically been time consuming, how can you adapt to this new, thrifty batch of agile little competitors, each eating away at your revenue?
There are even start-ups looking at peer-to-peer lending in the mortgage arena, an area in which banks probably never thought they could lose share to outsiders.
Another problem for traditional banks is the establishment of new, digital banks that are trying to multitask and mix it up with the best of them. Matthias Kröner, CEO of the entirely online Fidor bank, is one such example of the creative minds leading the traditional space.
Discussing the future of banking, from a general perspective, Kröner told me to pay particular attention one thing: “You need to understand and look at IT as a creator of value, and as a USP”.
‘If a customer comes to you because of a good price, they will leave you just as quick for the same reason’
– MATTHIAS KRÖNER, FIDOR
Kröner’s team never compete on price, thinking that’s the entirely wrong way to go about an industry as front-facing as consumer banking. “If a customer comes to you because of a good price, that means they will leave you just as quick for the same reason,” he said.
Instead, Kröner goes for what he calls “the conceptual advantage”. In this he means looking at tech companies, going down the UX route. A recent survey of Fidor’s customers found that just 2pc felt it was the same as every other bank. In short, it stands out to win.
Number26 is another of these recent inclusions into the banking scenario, operating as an almost entirely mobile service account provider. You set up accounts in minutes, money is handled instantaneously. Ease of use in its purest form. Number26 has even brought out a type of credit/debit card hybrid, receiving interesting reviews.
It is competitors like this that have forced the hand of traditional banks, who have had to meet customers in previously foreign locations like social media. For example, Bank of America is working with Facebook Messenger to deliver capabilities to do just that.
Exchanging of the guard
For a long time, currency conversion was as close to a licence for banks to print money as they could get. Offering a service that had a pricing structure beyond the comprehension of most holiday-makers, customers were at the behest of numerical charts in branches or kiosks, vaguely understanding, but never really knowing, what their money was truly worth.
In terms of disruption, foreign exchange was one of the first services to feel the wrath of the open source entrepreneurial community. Companies like CurrencyFair, Venmo and TransferWise appeared with an immediate, understandable service that captured audience to such a degree that any acquisition of these firms would prove prohibitively costly now.
Other issues for banks are as abstract and unfortunate as changes to common currency, with the establishment of the Eurozone removing a significant portion of this revenue stream. The noughties are far removed from the nineties, and it has even changed since.
Trust in us
Amid all the shifting ground and swathe of new entrants, established banks enjoy a priceless commodity: trust. Often through nothing other than longevity, banks establish an esteem that is hard to break, with customers wary of leaving their money anywhere else.
“The good news is 86pc of customers believe they trust their banks more than they trust others,” said Accenture’s Jackson, noting that the disruption we can all see in front of us right now is still a bit haphazard, leaving time for banks to get in on the first wave.
New entrants simply don’t have the distribution network of established banks. This distribution is layered up with branches, customer bases and this feeling of trustworthiness, something Tighe from Bank of Ireland thinks will always be important. “Fintech start-ups need to build [trust],” he said, although that might not be as hard as previously thought.
When you consider the past decade in which a financial disaster beset every corner of the globe, with banks front and centre throughout the entire unseemly mess, you’d assume that some of this trust has been eroded.
“What we have seen is traditional banks have suffered bad because of the financial crisis. They are also not held in high esteem. Nobody tells their friend proudly that they opened an account with HSBC,” said Stalf.
Further than that, how do you generate trust among millennials? Through big grey buildings? Old men in white suits? No, through peer reviews and feedback, which is the essence of the mobile world.
“Look on the App Store, you can build trust in different ways. If you have a good product, reviews can generate trust in a very short timeframe. 10 years ago it would have been a lot tougher due to the investment you would need to make in marketing,” said Stalf.
What are the options?
This messy conglomerate of start-ups, established banks and thirsty customers itching for easier and faster transaction options makes for an unpredictable future. But that future is one on which every player is making a gamble.
Those with the biggest stakes in the pot are the likes of HSBC, JPMorgan Chase, BNP Paribas, Deutsche Bank, Barclays, RBS and Santander. Executives are sitting in offices looking at pie charts, with more and more slender slices being removed from their control.
So, what can they do? There are three obvious options: innovate, acquire or partner up. The first choice is a formidable challenge, the second is remarkably expensive, and the third lacks control.
Option 1: Innovate
For banks to compete on an innovative level with nimble start-ups seems unlikely, yet many are trying to go down that route. Chief innovation officers adorn the executive levels of all major banks, but they operate in a world that is often beyond their capabilities.
There will always be someone out there with a better idea and, now that the barriers to market entry have been reduced significantly, they could emerge at any time. However, there are tools hidden away in banks’ armouries that could help.
Think of iZettle using its customers’ data to approve loans on the fly. Why can’t banks predict their customers’ purchasing behaviour better? “They have a huge advantage in this area,” said Accenture’s Jackson. “They have the tools to predict, they just need to work it all out. For example, they should have it in them to know when their customers are buying a car. They know what they spend their money on, where they use their cards etc.”
This isn’t just demographic planning, which I can attest is already being done. Once I turned 25 I was offered mortgage advice, pensions and savings accounts. I was even encouraged to borrow a small-ish sum and pay it back just to boost my future credit rating. This struck me as utter madness, and the wrong way to predict your customers’ behaviour, but it is evidence that attempts are being made.
“Banks need to work out their own strategy,” said Jackson. “Very few can afford to be an all-encompassing bank, others need to prioritise certain arms of their operation above others.”
But can they even do what they need to do? Last December, the European research institute BearingPoint found that the vast majority (90pc) of European banks recognised the need for digitalisation prioritisation, but at that point just 17pc felt up to the task.
Option 2: Acquire
Banks have a history of mergers and acquisitions. They have experience in this area so, logically thinking, buying up competitors seems like a no-brainer. The problem here is choosing the right competitors to buy.
As explained earlier, there are a plethora of fintech start-ups, often providing single, niche services. To pick the right one, at the right time, probably requires as much luck as it does foresight.
Take TransferWise, for example. The leader in foreign-exchange disruption, what bank could afford to buy it outright? These companies prop up and provide a service so valued that they’re too big to buy.
Tighe refuses to accept that banks missed a trick, and perhaps he’s right. Goldman Sachs is the latest financial institution to buy up a robo-advisor start-up, while BBVA has just picked up Finnish online banking service Holvi.
“We launched our own digital platform called FX Pay to make it easier and faster for our customers to access currency. The ball wasn’t dropped,” said Tighe of currency exchange in particular, arguing that what really happened was a huge number of entrants into the market made it a bit confusing, with each bank reacting differently.
If acquiring start-ups is the main tactic then banks are in an unenviable position because they can’t go too early, buying up a bunch of duds, and can’t go too late and spend above the odds. Decision makers have all this power at banks, but all this responsibility, too.
Option 3: Partner up
That leaves partnering up, something that pretty much everybody is doing right now. Start-ups like Deposify partner with Bank of Ireland. iZettle has linked up with Santander in South America. Rabobank is working with Tradle. Bill.com is so successful that three major banks in the US have partnered with it.
‘There will be no start-ups taking over, but there will be a massive shift as to where profits go’
– VALENTIN STALF, NUMBER26
Partnerships don’t all form in such an orderly fashion. A collection of start-ups may also realise that they can really challenge banks by grouping together. In China, for example, fintech companies have as many customers as the traditional banks, according to Citi’s Boyle.
In this scenario, the unbundling of the banking system that has gone on in the past decade would quickly reverse. “I think there will be a rebundling of the current system,” said Stalf. “There won’t be one app for savings, one for credit, one for loans.”
Indeed, Number26 has already partnered with TransferWise, as have many others. “I don’t think all banks will vanish,” Stalf added. “Some will do well. There will be no start-ups taking over. But there will be a massive shift as to where profits go.”
Option 4: Prize winners
None of the three options above are ideal, with pitfalls littered throughout. So what if you could overcome it all? For minimal investment, broad scope of possibilities and learning about innovative ideas as you go, scouting the lower leagues is a good place to start.
Fintech incubators and accelerators all over the world are being backed by major banks. The prize on offer for entrepreneurs is significant early-stage investment. For the banks, a stake in what could have become a viable competitor one day.
This trend is even reaching beyond areas of fintech that we’re used to. This month, Hannover Re, one of the world’s biggest re-insurers, is running a competition concurrently across Ireland, Germany, the US and South Africa. For those who may not know, re-insurance is when one insurance company buys insurance off another, and it is the backbone of quite a lot of what we consider the financial system.
What’s interesting about this competition, though, is it’s essentially a recruitment programme for innovators. People of an entrepreneurial nature are encouraged to enter, but they need know nothing about reinsurance or finance in general. On offer is a job at the host company.
Elsewhere, there are start-up competitions, incubators and accelerators with tailored programmes targeting solutions in select areas. The main driver behind this concept is one and the same: financial institutions have recognised that there are valuable minds thinking beyond their frameworks; their goal is to get them together and cherry-pick the best.
Game changers: Blockchain
This all leaves two major areas of concern for traditional banks, and major areas of change for banking in general in the future. Blockchain is simmering away beneath the surface at the moment, with a new take on currency one of the likeliest game-changers in the foreseeable future.
Blockchain technology, which underpins emerging digital, virtual, or cryptocurrencies, consists of blocks that hold timestamped batches of recent valid transactions, forming a chain in which each block reinforces those preceding it. Bitcoin, the best-known cryptocurrency built on blockchain technology, is causing waves.
‘When you make money programmable, the implications on every single financial product are vast’
– SIMON DIXON, BNKTOTHEFUTURE.COM
The use of blockchain as a way of tracing transactions in keeping with MiFID II regulations has been proven by Bank of Ireland and Deloitte. Elsewhere, Barclays has entered into a venture with virtual currency player Circle for an e-money licence.
“Bitcoin is not just a currency or commodity; it is more like a technology that makes money programmable,” said Simon Dixon of BnkToTheFuture.com. “And, when you make money programmable, the implications on every single financial product are vast.”
Dixon reckons that, over the next decade, bitcoin will play a prominent role in “some of the significant and powerful finance applications”, with researchers in the US even inventing a bitcoin-like system that could make digital cash more practical by allowing a central bank such as the Federal Reserve to control it.
The anonymity provided by the likes of bitcoin seems to appeal to many users, although Fidor, which is heavily embracing this future, has a different view. “I definitely do not understand the fundamentalists in the crypto environment saying that anonymity or anonymous status is kind of sacred heaven. I want to know who potentially wants to fool me,” said Kröner recently.
The transparency in underlying blockchain technology is undoubtedly appealing. Earlier this month, Wall Street’s bookkeeper successfully tested the technology to manage single-name credit default swaps among four of its biggest banks. That’s a ledger, fully referrable, underpinning the area of banking that brought about the financial crisis.
Game changers: New entrants
The real unknown for the future, though, is if and when major companies that already have the resources, already have the customers, and already have the expertise, move into banking. Should Google or Apple decide they want to become financial institutions, could traditional banks truly compete?
“Think about technology and financial licenses in the ‘wrong’ hands, like a telecoms provider or retailer which has millions of customers,” Kröner told me. “That, in my eyes, is the perfect storm for established banks, with competitors driven by a cool brand and a digital banking infrastructure.”
Stalf agrees, and it’s notable that two people deep in the modernity of fintech are thinking this way. Stalf thinks the likes of Facebook and Google have proven themselves willing to cannibalise their business model for the greater good. “Although banks know something is changing, I haven’t seen them be aggressive,” he said. “BBVA in Spain have been active, but they haven’t been successful so far.”
A recent look at millennials’ thoughts on banking should show just how troubling a reality this would become for banks, should ‘cooler’ brands get involved. Undertaken by the Millennial Disruption Index, it found that 73pc of banks’ youngest customers would be excited by the idea of someone like Apple, PayPal, Square, Google or Amazon handling their banking needs.
73pc of banks’ youngest customers would be excited by the idea of someone like Apple, PayPal, Square, Google or Amazon handling their banking needs
– MILLENNIAL DISRUPTION INDEX
The customer wins
Through all the challenges facing traditional banks and the conveyor belt of endless start-ups, the customer sits at home, scrolling through their phone doing one thing: winning.
As currency exchange competitors mount, costs reduce. As better, more digital banks emerge, less time is spent dealing with them. New banks mean new products on offer. New payments options can prove profitable and even produce different, tailored credit options.
Citi predicts that banks’ ‘Uber moment’ is coming, a tipping point that will see the balance of customers fall into the mobile-only arena. What follows will be massive redistribution of resources. From what I can see, though, the uncertainty won’t stop there.
Door after door is opening for the customer, but the draught this creates for banks makes for a chilly, exposed future.
Main customer image via Shutterstock