Banks have been accused of being lazy on innovation and slow to change, yet, it is one of sectors that invest more in technology and one of the most advanced in terms of rethinking their customer experience through digital revolution.
Traditionally, heavy regulations have made the creation of new banks almost impossible. This enabled banks to offer large suites of products and services to meet all their customer’s financial needs. It is only just recent, that regulators have tried to encourage more competition for the health of the industry. This has led to the establishment of new smaller banks, mostly digital ones. In the UK only, 40 new banks were launched in the past five years. They offer a better user experience and a more personalised service, but what attracts their new clients is not their improved services, it is often their higher interest rates.
Despite this aggressive wave of new competitors, the traditional banks remain strong and dominant. Banco Santander, BNP Paribas, Bank of America, Citi, Westpac, Lloyds, RBS, Barclays, HSBC, Deutsche Bank, Deutsche Postbank, Commerzbank have kept growing their businesses. Not at the same rate as during the golden ages of the early 2000’s, but they are so well established in our economy and have such an extensive customer base, that it is very hard to beat them.
Yet, it is a no-brainer that the industry will suffer serious transformation. Blockchain will be one of those mayor disrupters as well as Fintech, but these two innovations have been extensively covered in business press over the past years. I want to take a different look at the future and share my vision on how banks will be run and will operate in ten years after going through all these transformations.
1. Customer Journeys instead of Business Processes
Traditional Banks provide their services mostly through disconnected business processes and batches of applications: account opening, on-boarding, product sales, investments, complaints. A lot of work is done in a very manual, labour intensive, and error-prone way.
Business processes will be replaced by end-to-end user journeys. This will have a significant impact in the hierarchical and traditional way that banks are currently organized. Adoption of Agile practices, as recently seen in the Netherlands with ING and ABN AMRO, will be the norm.
Banks will have to learn some of the important skills that digitally borne companies have from birth: how to visualize and participate in far more broadly defined customer journeys—such as shopping, travel, and vacation planning. Every banking service will be available within three “clicks”.
2. Banks will need to develop their Ecosystem
We have seen how in order to keep competitive and foster innovation, several industries like automotive and pharma have established a model of partnerships with vendors, customers and even competitors to create an open ecosystem in which all of them benefit from common ideas that create greater synergies.
Besides the partnership with credit card companies, Banks have not adopted yet a truly open business model, but will need to do so in the near future.
One of the biggest disruptors is the rise of the open application programming interfaces (API) ecosystem. This technology allows customers to share their banking data with trusted third parties, facilitating payments, allowing product comparisons and creating a connected network of financial institutions and third-party providers that have the potential of creating a suite of new banking service apps with improved customer experiences.
API will force traditional banks to look for trusted partners to create their own ecosystem. Failing to do so, will put seriously at stake the ownership of their customers’ relationships.
3. Banks will attract techies and not bankers
Banks use the cost /income ratio to monitor the efficiency of their business. It is a metric that many analysts look at very carefully too. The simplest way to think about it is the expense base of the bank divided into its revenue. Every bank has it as one of their key performance indicators and decreasing it is one of the top priorities of many CEO's.
The digital revolution will change this paradigm. Digitalization increases the ability of Banks to automate processes and reduce costs to levels that have never been seen before. Lots of manual work will be eliminated and large parts of the cost structure, i.e. employees, will be shaved off.
We have seen already the consequences that Fintech has had in banks, and we will continue to see that trend. The challenge for banks to attack highly educated employees will increase as banks will be run like technology companies.
Traditional banks have not yet experienced the transformation that other industries have, but with the recent developments we are very close to enter that disruptive phase. If you are working in the Banking sector, please “Fasten your Seat belts and be ready for a bumpy ride”.