As traditional banks risk losing business to a new wave of start-ups, EY’s Niall Corrigan talks about what they need to do to stay relevant.
Back in 2016, Irish banks were ranked as having the second lowest level of trust by their customers in a survey of 32 countries; a hangover no doubt from the 2008 financial crisis and the bank bailout.
This goes some way to explaining why a more recent EY report from last September found an appetite among Irish consumers for alternative ways of managing their money. Almost three-quarters of Irish adults are using a new wave of fintech services, higher than the global average of 64pc.
The success of new entrants such as N26 and Revolut, the latter of which has already surpassed half a million users in Ireland, shows that data-driven services and customer-centric propositions resonate with people.
App-based offerings on mobile phones, such as money transfers and built-in budgeting, have been widely adopted. The crumb of comfort for traditional banks is that, while people may take up the ubiquitous offer of ‘setting up an account in minutes’, it’s rarely a direct replacement for their existing bank account.
Big value banking
Despite trust issues, a perceived integrity of old-school banking is still intact, particularly when it comes to lodging a salary in an account, paying bills, and financial transactions such as loans and mortgages. These more significant product purchases tend to be emotive, so there is an element of hesitation when considering new providers, while established banks are still regarded as safe and secure.
But change is inevitable. Tomorrow’s mortgage customers are today’s young people, a demographic that will have more affinity with alternative financial services providers they can access on their smartphones than banks on the high street.
Other areas of the payments industry have already changed. Offerings such as financing at the point of sale and day-to-day transaction products have been nibbling away at big value segments for years, and the Central Bank makes no secret of championing innovation and competition.
‘Some traditional banks may well lose out and some challengers will have successful IPOs and metamorphose into the establishment’
Where it can lead is characterised by what’s happening in Korea with KaKao, the company behind hugely popular social media messaging app KaKaoTalk. EY helped it launch KaKaoBank, the country’s first mobile-only bank, and it has been an enormous success.
Synergies between internet companies and financial services are not new. Google, Amazon and Apple all have products bundled into their digital platforms, but the transition of a small, local player into a fully-fledged bank may be a sign of things to come.
Threat and opportunity
The trick for traditional banks is to see the opportunity as well as the threat in all of this activity. As banking services evolve within a new digital ecosystem, their challenge is to find a role in it to secure their future.
They need to unlock inherent capabilities in new ways, starting with one of their greatest and most underleveraged assets: data. No one knows their customers better than they do, but they need to surface insights that will enable them to become more customer centric.
Banks know all this and are investing in new technology systems and trying to transform their operations. They are also playing catch-up when it comes to recruiting talent with graduates increasingly lured into the ranks of big tech companies. They need a tech and skills refresh and, hardest of all, a culture change to put the customer and business value at the centre of their business model.
They need to free themselves from legacy IT systems, leverage the cloud and a new generation of agile technologies that fintech start-ups have been using from day one. They need to accelerate digital engagement in an omnichannel world, better serving customers online through new digital channels while developing the market advantage of having a branch network.
New competitors can’t replicate local bricks-and-mortar banks that facilitate face-to-face interactions, which are still important for higher-end services.
As EY is seeing through work in its Wavespace innovation centre, the pace of change is accelerating and the sector is on the cusp of major disruption.
Some traditional banks may well lose out and some challengers will have successful IPOs and metamorphose into the establishment. Other start-ups will fulfil an ambition to be acquired, possibly by traditional banks looking to accelerate their digital transformation.
Variables are many in a fast-evolving market that will surely reward the most agile and inventive players. The only certainty is unprecedented disruption for a sector that has resisted it for longer than most.
Niall Corrigan is the head of digital and CX in EY Financial Services.