We caught up with Gartner analyst Kristen Moyer when she was in Dublin last week to talk to her about her recent research into banks, and the strategies they need to adopt to transform and survive.
The banking industry is in crisis, and transformation is needed – transformation which their current application portfolios prevent. They need to look at new models based on APIs (application programming interface) and apps in order to engage customers and respond quickly to new opportunities.
That is the view of Kristin Moyer, a research director in Industry Advisory Services/Banking and Investment Services at Gartner in Denver, Colorado. We spoke to her on a recent trip to Dublin about this ‘maverick’ research she had recently carried out – research that is designed to deliberately expose unconventional thinking and “may not agree with Gartner’s official positions”.
“The banking industry is in crisis, and there are really four main areas of crisis – the economic crisis, with slow to negative growth in established economies and slowing growth in emerging economies, and with the euro crisis hanging over all of that; the political crisis and the backlash against big banks; the regulatory crisis that has put downward pressure on the net profit of banks and on fee income; and higher capital requirements putting downward pressure on profitability as well,” says Moyer.
“There’s a really big gap in projected net profits required to reach the required 12pc return on equity, and that’s why the banks require a radical attack on both the cost and the revenue side of the balance sheet.”
The problem for banks is that their traditional applications are preventing the ability to transform and adapt to these crisis areas, and to build the banks of the future, says Moyer.
“The application portfolios are going in the opposite direction of business requirements,” she says. “Business requirements are that applications be able to adapt to change more quickly, that they decrease in cost and increase in transparency.
“Applications portfolios instead are increasing in their cost to maintain and their rigidity, and they are inhibiting industry transformation. A new approach is needed and that approach is apps.
“Applications are about the banks while apps are about the user,” says Moyer. “Applications are database-centred, surrounded by users performing workflow, while apps are people-centred. Applications are very complex, apps are simple.”
There is an opportunity now for the banks to transform their delivery models, says Moyer.
“Banks are focused on providing products reactively after customers ask for them. That’s been the delivery model for hundreds of years. With the convergence of mobile, social cloud and information, today we can start to do banking differently.”
What is required is a move away from a reactive delivery to what Moyer calls “context-aware” delivery.
“That means delivering banking services based on the context of the customer, that context being three main things: the need of the customer, the technology the customer is using, and the location of the customer. And from there they need to move to proactive service delivery, proactively providing something that enhances the customer’s finances, or returns in some way.”
It is time also, says Moyer, to move beyond the one-size-fits-all, mass-market products that retail banks provide today, toward much more of a needs-based approach.
“One way of accomplishing that one would be through a product factory that enables customers to build the products that they want, within bank-defined parameters,” she suggests, “while another approach is using platforms to enable others to build them products that they want and that involves public web APIs.
“For a corporate customer it could be APIs that allow them to customise cash management, or it might be payment models. Bank applications are too rigid to be able to accommodate some of the new form factors in payment, like mobile commerce, one-click shopping, digital content, online gaming. Enabling those providers to customise how a payment happens, while the bank still processes the transaction, that could be an opportunity.”
Rather than competing with the new online payment players like Square and PayPal, Moyer believes that these present some interesting partnership opportunities for banks to provide more choice to their customers.
“We think banks can become independent payment advisers, providing choices to customers through partnerships,” she says. “There’s the revenue aspect of an e-commerce transaction through, for example, PayPal rather than a bank, but the challenge is greater.
“Data and information is one of the keys to unlocking new revenue opportunities. Banks have tremendous amounts of data on their customers, and now there are many more external sources of data, like social media. Being able to turn that data into information is important, and if the bank isn’t part of the transaction then they are missing out on the data element, as well, by not having any visibility into that transaction occurring.”
The barrier to these kinds of innovations in the banks is not the technology, Moyer adds. The barrier, she says, is control.
“Customers already have control, and what banks need to do is to become more a part of the customers’ everyday lives. The customers’ lives do not revolve around banking. Banking needs to revolve around the customers’ lives.”
Moyer cites some banks that are already opening up public APIs, like French banks Crédit Agricole and AXA Bank, and others that have announced plans to do so, like Commonwealth Bank of Australia, ING and Capital One. Overall, she believes there is a growing understanding in the sector of the need for transformation. “I think most banks will provide a public API in the next two years,” she says.
Overall, Moyer says continuing with mass-marketed, reactive product delivery will make it impossible for banks to achieve growth and improve efficiency.
“Public APIs and apps together offer the opportunity to address this gap in profitability by increasing revenue and improving efficiencies, as well. We think it can close up to 30pc of the 45pc gap in profitability facing the banks.
“There’s always an opportunity in crisis,” she concludes. “The financial services industry is very innovative and here’s an opportunity to innovate. Very shortly this will be a requirement, rather than an option.”