What are the constraints to foster innovations in the traditional banking sector?
We see three main constraints for the larger banks: the disadvantage of being banks; the power of retail and tech giants; innovating against legacy.
Banks have hardly the space to innovate. They are highly regulated to manage systemic risk, infrastructure risk, and conduct. The financial cost and management focus to deal with this has been enormous. Furthermore, in reality it’s hard for Banks to exceed the expectations of their customers, easy to disappoint – for example, branch closures, security breaches and post-merger integration issues.
We often hear that banks aspire to be like the large tech and retail giants, whether in product innovation infrastructure data or customer. The competition is so strong and move at great pace, covering more and more ground, edging into financial services. Banks make marquee hires from these companies. How many go the other way?
Finally, the complexity of legacy – once revered as stable available reliable and functionally rich – combined with the impact of years of growth and consolidation for our banks – has led them to a place where innovation has been seen as difficult. The world’s big innovators don’t have this problem yet.
As with everything solutions are being found, and innovation is finding a way. The smaller banks have a different challenge. They just don’t have the scale to fund investment in massive innovation or the customers with the appetite to consume it.
Do you consider fintechs as disruptors or innovators?
They are both. At the outset, fintechs were seen as disruptors, their agility and niche-specialty impacted traditional bank revenue streams such as p2p lending and payments. However increasingly fintechs are becoming integral parts of traditional bank ecosystems – as technology advances and new regulations emerge, fintechs can provide solutions at an efficient time-to-market and commercially attractive price point, enabled through cloud-based solutions and API MicroServices oriented architectures.
We’re certainly learning a lot about change and innovation from the fintechs. We don’t think we can yet tell what the lasting legacy is.
Describe “Banking in 2028” – how do you see the role of banks in 10 years?
Pervasive, fragmented, embedded, long-term. Digital will be normal, perhaps a retro term again.
Some banks may have moved out of lend save pay into platform enablers and providers into high ROE business. Some banks may focus on customer lifecycle, products, and low ROE business. Some may change ownership and be consumed by larger (possibly tech companies) to play a part in an ecosystem or conglomerate. Today’s touch-points will probably be gone, embedded in actions – KYC could be from birth, financial planning, and relationship management for life. And they will be long-term investment and savings based, because we’ll be dealing with 40 years of retirement for the standard European customer.
Ian Hooper and Senol Mehmet, Capco