Just how open should we be to open banking? Are digital challengers friends or foes? FinTech vs. TechFin: which one is the way to go – and to grow? Today’s financial services landscape is so full of twists and turns that it gives Game of Thrones a run for its money.
We sat down with IDC Financial Insights’ senior research analyst Martin Stiller to talk about the now and then of banking, both digital and physical, customer needs and market wants, and why it’s time banks shifted focus from point of sale to point of interest.
The competition for banking customers is at an all-time high these days. What do you think will decide between success and failure both for traditional banks and challengers?
I agree, it has been a challenging market for established players, and now it seems even less attractive for new entrants.
Recent regulatory changes have forced banks to make their products easier to understand and more accessible for the mass population. Banking clients in Europe enjoy good quality financial services while banks make little to no profit on essential products. Going forward, low margins will hit today’s cash cows like consumer and corporate loans, and industry players might find themselves in a difficult situation.
I believe that success in the digital era will rely on the ability to operate at a high scale, while offering clients modern digital and personalised services. Banks’ back office needs to be lean and fully automated to keep costs to a minimum. A successful bank will offer a seamless customer experience through digital channels and at the same time will act as a solid and reliable infrastructure provider for business platforms and partner ecosystems.
What is the biggest gap between what today’s customers want and what traditional banking is currently delivering? What are the biggest obstacles preventing banks from keeping up with changing customer expectations?
Traditional banks are strong in selling if a client comes to a branch. On average, conversion rate at physical channels is higher by a factor of ~50 compared to digital channels. Banks are using the latter for pushing batch campaigns to specific customer segments. However, addressing client needs real time, providing actionable insights and personalised products is something that will replace face-to-face interactions completely.
Achieving it should not be that difficult. Banks have all the data and capabilities to predict clients’ future needs, and to capture the micro-moment of intent not only at point of sale but at point of interest. They should be able to recognise when their client is organising a wedding, going to college or planning a holiday. At the same time, they are in a better position than any other institution to act as a trusted partner.
Nevertheless, building trust and obtaining clients’ consent is and will be a major obstacle to precise personalisation. The Facebook-Cambridge Analytica scandal demonstrated how quickly and easily a company can lose trust even from loyal customers when it doesn’t protect their data sufficiently. Banks – or actually any organisation – must be highly transparent as to how they gather, share and protect client data to be effective in personalisation.
New players in new roles
How about neobanks? How do you think they will evolve?
Neobanks have the big advantage of starting on a green field without having to cope with legacy issues that cause cost inefficiencies to traditional banks today. From the very beginning, they have been client-centric and are not afraid to operate critical workloads on a cloud platform. They can afford to keep prices low and gain profit from scaling up their business.
On the other hand, many of them are struggling to serve higher scale with automated service desks that are often unable to solve clients’ problems. Accessing human support usually takes longer than expected and is often hindered by language barriers. I was once told that “if you are certain about your service, you don’t need to speak to your guests at all”. This is especially true for banking. Instead of having large service desks, they should be continually aiming for service perfection.
Going forward, I expect that many customers who have left traditional banks will be returning, as European incumbents attractively price essential banking services and have modernised digital channels as well. Therefore, soon the digital wave will come to a point when the market needs consolidation. I believe there are many synergies that neobanks can bring to incumbents and vice versa, especially automated and scalable back office on the one hand, and experience in maintaining banking secrecy and resilience against financial crime on the other.
Now that Apple has announced its new credit card, what’s next? FinTech vs. TechFin: who do you think will win?
European consumers are still quite conservative, and for the time being I only expect an improvement of the status quo. Mobile payment like Apple Pay has probably been the biggest innovation that the average European consumer has adopted since credit cards appeared. Now, low-profit consumer banking is causing B2C FinTech to disappear, and new start-ups rather partner with banks as technology vendors than building their own scale of paying consumers.
On the other hand, there is a great opportunity to disrupt the freelancing segment with technologies like mobile terminals and new x-as-a-service models improving treasury and liquidity management capabilities, for instance. Outside of Europe, TechFins like Alibaba, Amazon or Google are pushing hard to remove frictions between industries and to meet expectations of their digitally skilled customers.
I expect TechFins to bring conversational banking as a new interface that will change the way we bank today. At the end of the day, Fin, FinTech and TechFin will all be complementing each other and will find their strong and unique position in the partner ecosystem. Open banking is a key enabler for building frictionless machine-to-machine customer journeys across industries.
Banks, FinTechs and TechFins: stronger together?
Why is building partnerships the way forward in the financial sector and who should banks team up with?
Just like a restaurant that partners with the best farmers, butchers, interior designers and so on to create the best dining experience, the same works for the financial sector. Moreover, the majority of FinTechs are cloud-native and deployment is promptly done through APIs so implementation of a banking partnership should be even easier than having fresh ingredients delivered to a restaurant.
The industry is moving too fast for anyone to act in isolation. The only way to succeed is to focus on what banks are really good at, which is banking. Let me give you a few examples of powerful partnerships. Banks should rethink whether they really want to be a tech company and whether their core system is a competitive differentiator. A partnership with a specialised IT vendor can bring a lot of benefits. Specialised vendors have better resources to operate multi-tenant banking systems and infrastructures on a private or public cloud, maintain a high level of security and deliver best-of-breed functionalities. What is more, these service providers often create entire FinTech ecosystems, integrate their solutions and oversee due diligence. Why should each bank be doing this? We have more than 6,000 banks in the EU.
Partnership with other industries, or industry mashups, give banks access to a new pool of potential clients. Banking products have never stood at the forefront of our consuming life. Clients first want to buy a car and then think about how to finance it. Banking, at the same time, acts as a backbone of nearly all industries and often represents a bottleneck in their customer journeys. Industry mashups not only remove frictions but create an opportunity for new business models, increase the efficiency of digital sales and provide actionable insights to banking customers.
Partnerships with TechFins also allow banks to leverage their digital channels and gain access to hundreds of millions of digitally savvy consumers. You’ve mentioned the Apple Card. Apple has launched its credit card in partnership with Goldman Sachs. Even though for Goldman, consumer credit is quite a new territory, it has solid banking experience.
Apple doesn’t risk any reputation misstep or having to pay antitrust penalties. Now, if Apple would like to introduce something similar in Europe – although I am not sure if they would be able to reward customers the same way as they can in the US – a partnership like this with a TechFin would be quite a big win for a local bank. Especially if said bank operates with a specialised banking licence available today in Lithuania, for example. The TechFin would single-handedly provide access to 500 million consumers.
How is AI changing financial services?
Quite significantly. Cognitive tools are already widespread across all functional areas. Tools available today can accelerate and automate operational processes, substitute many human activities at service desks, detect financial fraud, support risk management and so on. Such tools give banks the power to reduce human errors and keep operational costs to a minimum.
Consumers also start favouring conversational interfaces like chat-bots or voice assistance. Banks should be capable of processing queries from those tools through their API gateways. As we spoke about industry mashups earlier, I believe that in the future those digital assistants will be capable of processing complex instructions like travel arrangements, based on consumers preferences, or submitting tax returns.
Digital banking sales in the age of the customer
How will digital sales in banking change in the coming years as a result of these trends?
In the coming years, banks’ distribution strategy will rely on digital sales from external channels. Services provided through open APIs won’t generate a significant amount of revenue but will act as a hook for engagement with new customers and for selling traditional products. Internal digital channels will have the ability to provide a service level that customers receive from branches or call centres.
Banks should be revising their existing distribution strategy and consider open banking as a new growth enabler that makes digital sales more efficient and allows access to new pools of potential customers.
Why should banks invest in an insight-based digital sales and engagement tool, and what should they pay attention to when selecting a partner?
A move from traditional batch campaigning to real-time, insight-based digital sales would be a logical decision considering what customers are expecting today and where the market is heading. Such tools give banks the power to evaluate the price elasticity of individual customers, and approach them only when there is a need and when the offer creates value. This way they can create engagement before a potential client starts doing something else or goes to the competition.
Similarly, banks have too many ‘sleeping’ customers. Reactivation and up-sell require a precise approach, accurate information and good timing. Overall, a shift from batch to real-time campaigning should be a natural evolvement of banks’ CRM capabilities.