By Tiffany Carpenter, Head of Customer Intelligence at SAS UK & Ireland
Redefining banking in a financial services market where your biggest competitor may be Amazon or Google, not a traditional bank.
Open banking may not have made much of an impression on consumers yet. But it’s a topic that the industry cannot afford to ignore. Tier one UK banks are already bound to grant licensed startups access to transaction-level data, and smaller banks are likely to have to follow suit in the near future. The potential impact on the banking landscape is profound.
Today, the standard business model for retail banks is to build strong relationships with their customers by offering free current accounts and other incentives. These services are a net cost to the business, but they help the banks win trust and provide a channel for marketing more profitable products, such as mortgages, loans and wealth management services.
Open banking threatens to sweep this business model away like an avalanche. Agile fintech companies are already developing apps that aggregate all the financial services that a customer receives from any provider, creating a single point of control.
This will certainly improve the banking experience for most consumers. But it will also add a new layer between banks and their customers. All communication with the customer will happen via the app – and the app provider will control that communication channel, not the banks.
According to market analysts, this poses a real threat. If a bank can’t upsell high-value services to its customers, it may be left with a thin share of the market. Banks could be drowning in current accounts while app providers skim the cream of profitable loans and investment services off the top. Bain & Company point out that similar disruptions in industries, such as music and travel, have seen incumbents’ profits fall by 10% to 20%, often within fewer than five years.
Threat or opportunity?
While the stakes are high, the odds are still in the banks’ favour – at least for now. For decades, they have collected data on millions of customers and billions of transactions, across the whole spectrum of financial services. This data is a priceless source of insight that banks can use to create customer experiences that their data-poor fintech competitors simply can’t match.
For example, instead of just helping customers make payments or check their balance, a new generation of banking apps could provide users with much more relevant, personalised advice. By comparing individual spending patterns with the behaviour of a wider population of users, they could pinpoint topics that users really care about –reducing utility bills, for example, or paying off a mortgage – and suggest helpful strategies for meeting their financial goals.
Banks aren’t just worried about competition from fintech startups. There’s also a risk that other data-rich companies could make a beeline for the financial services market. Amazon, Apple, Google and other tech giants already have enormous quantities of information about consumer spending habits, as well as some of the world’s most talented data scientists, UI and UX developers. If they want to build the world’s best banking app, they seem to have all the right tools already. What’s to stop them from seeing financial services as their next market to dominate?
Again, the answer is that banks still have the advantage, at least in the short term. There is more to a user’s personal finances than just online shopping habits. And banks have a much more complete picture of how people borrow, spend and invest their money across mortgages, loans, credit cards, savings accounts, stocks and funds.
More importantly, customers trust their bank to manage both their information and their money. As a heavily regulated industry, banks simply cannot afford to play fast and loose with their customers. Meanwhile, barely a week goes by without another scandal about an internet company selling, losing or misusing customer data.
So while you probably trust online retailers to deliver your shopping, you might still have a few qualms about letting them manage your pension.
That said, customers’ trust and loyalty are finite commodities. If banks don’t act on their advantage now, they will lose it little by little. An outstanding user experience can easily seduce customers. And if you can’t provide one, your competitors certainly will.
On your marks
In short, the race to build the killer banking app is on – and banks, fintechs and other players are all in the running. Whoever gets there first will win it all, leaving the others scrambling to redefine their role in a banking industry that bears little relation to today’s world.
The difference between winning and losing, as we’ve already hinted, will be in the data. If banks can mobilise the treasure trove of data they already possess and harness artificial intelligence and machine learning to bring insights closer to the point of customer interaction, then they will be in a powerful position to lead the next stage in the evolution of financial services.
And that’s not just wishful thinking. Take a look at our case study with ICA Banken. SAS solutions are helping ICA Banken analyse customer behaviour online and combine it with historical banking data to create a fully personalised and customised user experience. While customers browse the ICA Banken site, intelligent algorithms automatically assess their needs and display helpful information and relevant offers in real time, resulting in a tenfold increase in conversion rates for the bank’s campaigns.
THE RISE OF CHALLENGER BANKS AND HOW LEGACY BANKS ARE TRYING TO KEEP UP
Jean Van Vuuren, Regional VP for UK, Middle East and South Africa at Alfresco
The finance world has been going through major changes in the last decade and many banks have become technology companies in almost every way. From online banking and apps to track activity, to the closing of high street branches and the rise of online only banks, this is a global trend that has been hard to miss.
Despite the introduction of challenger banks to the industry, many of us still rely on large, traditional banks to keep our hard-earned money safe. So how do these institutions take inspiration from the new emerging banks and put it into practice whilst keeping themselves relevant to a society that is increasingly reliant on technology? And what is next in the wave of digital transformation for financial institutions?
Using AI as part of the customer experience
Banks prioritising the customer experience has increased by leaps and bounds in the last 5-10 years, but it doesn’t just end with the launch of an app or the re-design of an online experience. The customer experience needs to be revisited regularly and continually play a core role in the adoption of the latest technology available.
For example, the future of AI in the banking world is very exciting and is completely transforming the customer experience. Voice banking, facial recognition and automated tellers can help create a completely personalised experience for each customer. Someone could walk into a high street bank, AI sensors at the door could use facial recognition to let the teller know who has arrived and they could automatically pull up all the information about their account without having to ask for their bank card or details.
As technology gets more sophisticated, this opens up possibilities for banks to focus on advising customers rather than spending time on transactions and processes.
Trusting the security of the cloud for confidential documents
The cloud has completely transformed the way in which we store information on our smartphones, computers and within the enterprise. However, as with any technology it comes with potential security risks. Trusting a third party with your data feels risky in most industries because you no longer feel in control of it, but banks are often trusted with our most precious data – not to mention our money. Therefore, maintaining confidentiality is of upmost importance to banks in order to maintain the trust of their customers.
Financial institutions should make sure that they are not relying on security embedded in cloud platforms to do the heavy lifting. Implementing governance services that provide security models, audit trails and regulate access – even internally, and confidently demonstrate that compliance is key for an industry with so much access to personal information. Whilst working in the cloud offers flexibility, it needs to be made secure with intelligent security classifications and automatic safeguarding of files and records as they are created.
This also brings up the issue of legacy platforms from a security and feasibility standpoint. Fund management companies find that legacy platforms are very expensive and not cloud ready. There is very little room for innovation and it is hard to adapt them to meet customer demands. Even if a fund management company has migrated to a Saas or Paas solution, quite often regulatory obligations and the potential dangers posed by hacking and data breaches mean that they sometimes go back to using an on-premises solution. Instead of backtracking, financial institutions should spend time to understand what the best cloud option for them would be and how they would implement it within the confines of governance and compliance.
Discussing going paperless in 2020 may seem like going back to the past, but for many financial institutions making the transition to fully paperless operations is still a work in progress. This is also a key area where challenger banks which have never had paper-based processes have an advantage, they don’t have to adapt simply because they were born paperless. There is also a new generation of consumers that embrace and often expect paperless banking.
While the Fintech industry is intrinsically paperless, banks are still adapting to phase out paper support, but this transition should be an integral part of updating the customer experience. The paperless movement involves moving from simply depositing checks via smartphone to a complete digital experience from end-to-end.
Going paperless also provides an added layer of security in accordance with a rising tide of regulations and government mandates. With digital records, automated management processes allow companies to set up rules around metadata to file records, put security procedures around them and also deleting personal information within retention regulations.
Keeping pace with challenger banks who are born of today’s technology
In recent years, the introduction of technological advances such as digital ID verification, e-signature and risk analytics are transforming the way financial service providers interact with their customers. New challenger banks build whole systems in as few as two weeks and automate as much as possible. By their very nature, challenger banks are pushing their competitors to be more agile and they are growing exponentially, something which the high-street banks had underestimated when they first entered the market. Created for the digital first generation, challenger banks won market share by putting customer-centric products at the heart of their business. They are also able to improve the product and the user experience quickly according to customer feedback.
Mobile banking innovators are completely disrupting the market and are increasingly leveraging these new technologies to fully digitise their processes, enabling them to deliver new and faster mobile services entirely tailored towards the needs of their customers.
HOW EMBRACING COLLABORATION CAN DRIVE INNOVATION FOR SMALLER BANKS AND BUILDING SOCIETIES
– Simon Healy
Consumer demand for digital banking products is high. As recent Unisys research shows, half of potential customers say the freedom to open and manage accounts online is a key driver of choice – while a third want a mobile app. So, if banks want to keep attracting and retaining customers, digital has to be on the agenda.
Unfortunately, smaller banks and building societies are facing some serious challenges when it comes to delivering the necessary level of digital innovation. At the same time, competition in the banking sector is fierce, increasing the pressure even further. Something has to change.
Understanding the competition
Digital-first neobanks have taken the market by storm in recent years, reimagining how current accounts function and offering innovative services through app-only banking. Customer expectation around digital banking has broadly risen as a result, with these capabilities felt to be a ‘standard’, rather than something that sets a bank apart.
Well-established high street banks – most of whom have a significant number of customers, as well as deeper pockets than your average building society – are also investing heavily in digital capabilities. And all the while, non-bank brands are circling the sector, with many big-name retail technology players expecting to enter the market over the next few years.
Combined, this places serious pressure on building societies and smaller banks, many of whom have limited investment budgets, a smaller pool of innovation resource, and a historical reliance on manual processes.
The value of trust
But – as Unisys research reveals – it’s not all doom and gloom for these institutions. While smaller banks and building societies might not have the large investment pots or the internal resource to accelerate digital innovation, they do seem to have strong reserves of customer trust to build on. In the building society sector, for example, nine out of 10 current customers still expect to be a building society customer in the next five years, citing trust in the brand as a key driver.
Meanwhile, customers are more likely to want a digital account offering from a building society than a neobank, highlighting a clear opportunity for building societies to seize – if only they can find the digital fuel to drive their innovation forward.
Embracing Open Banking to drive innovation
Once upon a time, product innovation in the banking sector was an inward-looking and investment-heavy process. But now, with the introduction of Open Banking, that could change. Over 60% of consumers who know what Open Banking is believe it’s key to attracting new customers. And with its introduction, there’s a real opportunity for smaller players to develop their products in a new way, delivering fresh customer experiences by integrating with other providers and technologies.
The beauty of this approach is that better customer service (and a broader product offering) can be achieved by collaborating and integrating with other providers, rather than developing the technology in house. As such, smaller banks and building societies won’t be restrained by their limited budgets – instead, they can simply focus on delivering the products their customers need, and the high-quality services they expect.
Although we’ve only seen fairly limited account aggregation so far, this could be taken much further in order to drive significant customer revenues. For example, Open Banking can provide the framework and the safe transmission of data for Embedded Banking, in which banking services are an integrated part of a broader customer service journey.
Most consumers already have some experience of this – just think about how payments function seamlessly in a service like Uber. But this functionality could be pushed much further. Applied in the right way, consumers could be granted the ability to take out a car loan as part of their search for the perfect vehicle. They could even secure a mortgage with minimal hassle during an integrated, online house purchase.
The appeal of this is clear. Embedding banking could significantly reduce friction and empower customers to receive the services they want, where they want them, and how they want them. And this could serve as a valuable distribution opportunity for banks and Building Societies struggling to find the investments needed to keep up with the digital innovators.
Exploring the possibilities of collaborative harmony
It’s an exciting opportunity that doesn’t only apply to personal finance: Unisys research shows that consumers would like to see building societies offer more business banking products. With an Embedded Banking approach, businesses could benefit from the ability to access an integrated bank account and accountancy solution, for example. It’s an area smaller banks and building societies could seek to develop.
Of course, this requires a degree of collaborative harmony, with different organisations working in tandem. Yet the general sense in the industry does seem to be a move towards this, in recognition of the fact that outcomes can be improved across the industry by taking a collaborative approach. Ultimately, nearly all financial services know that digital transformation is a vital undertaking to remain competitive – and this can be achieved more effectively by working in tandem with one another.
However, this isn’t a one-off assessment – smaller banks and building societies should keep one eye on the horizon, and reflect on how emerging capabilities like Open and Embedded Banking can help to ensure they don’t lose ground in the future. Customer sentiment is clear, and it’s apparent that consumers want smaller banks and societies to do well – it’s simply a case of embracing the right digital drivers to succeed.
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