To stay relevant in the new technology driven world, banks need to start addressing their one-size fits all approach to customers and products. They need to be prepared to operate in a multi-channel, multi-platform environment and create value from this new business model.
Nuruddin Walyani is a finance professional with over 15 years of experience in financial services and technology – focusing on strategy, business model and innovation.
Here he shares his thoughts on how banks should respond to fintech disruption
Digital and technology-driven creative disruption is taking place all around us. We see this happening in all areas – with considerable business model disruption the norm in many industries such as consumer retail, travel and hospitality, health and wellbeing, and of course in financial services.
The traditional banks operating in the financial services sector cater to many different kinds of customers, from retail to High Net Worth (HNW), Small and Medium Enterprise (SMEs) to mid-size corporates, multi-national corporations to financial institutions. They serve many different purposes and provide different functionality to customers and the economy in general, ranging from credit and liquidity, transaction execution, risk management, market-making, advisory, custodian and trustee, and most importantly, managing the customer relationship. The current product strategy and operating model of banks is a one-size-fits-all approach – standardised products for each client segment. With the advancement of technology, customers and clients expect to be provided customisable, innovative and improved products, and better user experience and service (thanks partly to the trend set by big tech companies and innovative niche players). Given the breadth of services provided by the traditional banks, to be able to innovate, modernise, customise and deliver on user expectations is a huge challenge – requiring enormous amounts of resources and investment, and frankly none have come close to achieving this.
This has created gaps in the market, which the neo-banks and challengers are exploiting, unbundling the services and offering customisation with their niche and targeted approach, addressing the need and offering massively improved user experience and solution value to their customers and clients.
So how do the traditional players respond to this threat?
Traditional banks, both large and small need to strategically address three key areas to be able to compete with fintechs and neobank players: Product Development, Technology Stack and Customer Relationship. Banks need to be very clear what they are and want to be to the different segments of the economy and the role they will play in the commercial world of the future. This needs to be aligned to their own strategic objectives, competitive advantages and value add that they bring to the market.
This is an area where banks have lagged over the recent past. Most of the banking products that consumers use today have been the same for the past 50 years, such as current account, savings account, credit cards, loans and mortgages. Whereas consumer behaviour, lifestyle and needs have moved far ahead. It is a similar situation in banking the small and large business segment, with traditional lending, trade products and payment and cash management the bank’s main calling card. Is there an opportunity in understanding what is a better solution for the 21st-century consumer (and for that matter the business customer), and how banks should innovate and bring new products and solutions to the market?
Over the past 10 years we have seen innovation in payments, primarily by non-bank and startup players, as a result of the massive increase in e-commerce and the rise of retail and other platforms the like of Amazon, eBay, Shopify, Alibaba and JD. With the broader changes that are taking place in the world – such as the transition to a net-zero carbon world, demographic changes driving new financial needs and the massive wealth creation and transfer, and the advent of the Internet of Things – these will bring opportunities to innovate, create new products and address the unmet customer needs. Provided that banks are ready and up for the innovation challenge.
Banks need to modernise their service and come up with innovative and customisable solutions in their product suite. When considering product development banks need to pursue unconventional streams and think not just on how to address their own customer base and their traditional markets, but expand their thinking broad on how they can create new products and open these up to non-customers in non-traditional segments and markets. This will enable the banks to expand the size of the addressable market, bringing huge scale and giving it network power. A bigger user base will allow for a better understanding of trends and behavioural changes (through data analytics and AI), giving it stronger platform competitive position.
In the new tech-advanced digital world, products need to serve multi-platform use cases. Just as banks sell mortgage products in the UK from their own branches or websites, and also sell them through mortgage brokers (which is just an older form of a platform providing end customer different options from a host of sellers), banks now need to be able to sell their services through their own sales channel as well as through online platforms and market places – be they for consumer retail, travel and holidays services, home buying, or wholesale trade – as this is where commerce is taking place more and more. Furthermore, banks need to come back and take their place in banking and serving the platform and its retailers as this is one area where banks have been seriously behind the curve. But in order to do so banks need to innovate their products and capabilities to meet the needs of the modern way of commerce.
Legacy technology is definitely one of the major bottlenecks hindering traditional banks innovation efforts. The systems of most banks were not designed to be as customisable, adaptable and connected in the way that commerce now takes place, particularly with Cloud-native technologies.
Neo-banks and fintechs have a technological edge over their traditional and larger peers – as most of the new entrants use technology build in the Cloud, adaptable and customisable, easily connectable to other services through APIs. But most of the technology that are being used by neo-banks is not home-grown. They are using multiple third-party developed modular systems and services to acquire and deliver functionality which they choose to integrate into their products. As a result, many neo-bank startups are able to launch their businesses well within a year from concept to fully-functioning products with slick customer experience and all the bells and whistles. So why can’t banks do the same?
Banks need to modernise their core technology architecture. This then enable the modular creation of adaptable and customisable product solutions. They should be open to using third-party services alongside their proprietary system to deliver for the customer. Their technology should be capable of integrating with emerging technologies (such as electric vehicles and autonomous transport, digital healthcare and digitally controlled mechanical processes). Such moves would enable product managers, innovators and technology specialist to work closely and build new and innovative solutions to address customer needs and expectations.
Customer Relationship and Business Model
The modern customer expects to interact with their bank quickly, easily, at all times and be able to access and combine their banking service from within ecosystems to get customised solutions. Perhaps the biggest shift required for banks is to understand and prepare to operate in a multi-channel, multi-platform environment where users access the bank’s service through a combination of direct channels (the banks app, website, call-centre and branches), indirectly through multiple (often non-financial) platforms and ecosystems and through standalone services. This will result in a hybrid customer relationship model where the bank will not necessarily own the customer value – a fundamental shift in the way that banks have operated so far.
To really further their ambitions and position in serving future financial needs, banks need to be open to running some operations which could be standalone mono-services addressing large-scale market needs (such as payments), bringing market reach and value to the organisation.
Banks need to come up with viable multi-dimensional customer strategy and business model where they serve and can create sustainable value even in a hybrid customer relationship environment. They will need to learn to acquire business from non-traditional sources and be able to retain and create value from this business model.