The financial services industry moves at a glacial pace. The simple act of taking money out of an ATM or visiting a bank hasn’t changed in decades.
Yet even the most traditional industries aren’t immune to technology. Digital innovations in the banking field are coming at a furious rate. Blockchains, mobile payments, and other newer technologies are creating tremendous opportunities in finance.
In fact, it’s no exaggeration to say that banking — once considered among the most staid and conventional of industries — is being roiled by innovation.
Banking is being transformed by digital technologies — but where are they coming from?
Like many industries, the impetus for change in banking wasn’t internal. The innovations of financial technology firms have put pressure on traditional banks to evolve.
In a recent episode of the SMACTalk podcast, Falk Rieker, Global Head of SAP’s Banking Business Unit, alluded to this transformation by noting that “innovation in banking is occurring at a rate that hasn’t been seen in decades.”
Blockchain technology is one example. By creating a seamless series of tied transactions, banks can realize tremendous time and cost savings. Users, whether they are customers, bankers or auditors, can retrospectively peer into individual transactions without any holds. The amount of tracking or reconciliation required is lowered significantly.
While it may sound counterintuitive, the development of this kind of digital technology often comes in emerging countries rather than developed nations. After all, necessity is the mother of invention. Many people don’t have a laptop but do have a cell phone; this becomes the impetus for mobile innovation. In places such as the U.S. or the U.K., the pace of innovation often lags places such as China, Brazil or Africa.
Part of this is cultural. The banking industries in developed markets tend toward conservatism. Innovation occurring at a breakneck rate may be viewed as something to avoid. This is one reason why Americans are still using ATM cards, while Chinese consumers don’t even want to use credit cards, preferring to be mobile. Whole ecosystems, such as Alibaba and WeChat, have grown to support these preferences. These platforms aren’t arising from the traditional banking space but rather from technology firms.
Ultimately, however, technology and consumer preference will determine how banking services are delivered. So how do banks prepare for this exciting new digital world while still protecting themselves from the effects of disruption?
Why banking is needed — but banks are not
The structure of banks as we know them is a relic of the past. Were we to devise a banking system from scratch today, it would no doubt look very different.
“Banking is needed; banks are not,” Rieker said. “It’s that simple.”
Rieker points out that retail banking services, wealth management, and corporate banking can all be delivered outside the traditional banking system. It’s simply a matter of how long it takes the transformation to occur.
The finance industry has been insulated from innovative competition due in part to regulations. Compliance with laws and regulations in the banking industry is an ongoing struggle for organizations in the field. Yet technology firms that provide banking services are often not regulated to the same degree. This allows them the flexibility to innovate while forcing banks to keep pace. The protective regulatory walls of the finance industry have been breached.
This doesn’t mean banks are doomed. They still have two very large advantages: Market share and data. Data is critical in terms of targeting and retaining customers. Banks with the best data have the most actionable insights into what people need.
Banks have an enormous amount of financial and personal data that can use to discern the best way to earn the loyalty of consumers. They are making massive investments into leveraging this data in as many ways as possible, though it should be noted that non-bank challengers aren’t at a total disadvantage. In the U.K., open banking laws require banks to share customer data with third parties if the customer agrees. Should this idea find global traction, it could have profound consequences.
“This will bring a totally different game up,” Rieker said. “And it will be on a level playing field, unlike in the past when (banking) was an industry nobody could enter.”
Market share, of course, is a critical advantage in any business. Armed with millions of customers and billions in resources, banks have the cachet and capital to take the best innovations from smaller competitors and tweak them to fit their own aims. With these kinds of inherent advantages, it will take more than innovative new services to topple the existing banking structure.
Ultimately, banks that use digital tools to expand their offerings beyond what we consider the traditional purview of banking will be positioned to prosper. The possibility of integrating banking services with energy or telco accounts is an idea that consumers will find appealing, for example. Banks of the future will also need to focus on improving customer experience. Banking should be a pleasant experience. It should be integrated with other relevant industries. The digital end-user experience should be compelling.
Banks that get this right will win the future. Those that don’t are almost certain to struggle.
“Banks have no choice,” Rieker said. “Either they adapt, or they die.”
Banks have long operated in a traditional, conservative industry that has been protected to some degree from innovation. Today, however, innovations from outside industries and the developing world are occurring at a furious rate. Banks can no longer rely on regulatory protection.
The banks of the future should focus on a few key areas. First, an improved customer experience augmented by stellar digital offerings and services rooted in a strong digital core. Second, tighter integration with other industries and providers. Third, leveraging the use of data to generate key insights about consumers.
By employing these strategies and keeping pace with the speed of innovation, legacy banks can ensure continued relevance in the digital world.