The advent of the on-demand, frictionless mobile economy has dramatically shaped customers’ expectations of service delivery and excellence. The retail banking industry has been historically slow to adapt to the step-change in consumer demands: progress has been curtailed by tiresome regulation, complex legacy systems and a reliance on conventional ways of working.
The ever-increasing distance between customers’ expectations and banks’ offerings has exposed an opportunity – an opportunity which emerging and established innovators and entrepreneurs have been quick to capitalise on.
These innovators are disrupting the retail banking landscape, portioning out the traditional more holistic retail banking offering in pursuit of a reformed customer experience that targets a specific friction point. Since 2014, over 30 UK organisations have applied for a banking licence, with successful applications steadily being announced: digital challenger bank Monzo received its much-anticipated banking licence just last month. But as more FinTechs emerge, a key question remains to be answered: to what extent will they really change the state of play? Have we simply fabricated a smokescreen of hype and excitement around a far more pragmatic reality?
Atom Bank made the headlines when it attracted investment from the Spanish banking group BBVA (giving it an implied valuation of £150m) without even having a single customer. Similarly, the majority of ‘startups’ are a far way away from turning any kind of profit. The cross-industry fanfare serves purpose in forcing incumbents to rub the sleep from their eyes – but the reality is, we’re still a fair few plays away from calling ‘check’.
If current market leaders can change gear before the startups pull out to overtake then they could feasibly retain market domination. Banks need to realise that this threat is real but also that it’s still not too late to play a winning hand.
Play 1 – Conventional: necessary but not game changing
The default too often is to turn blindly to ‘technology’. Desperate cries for ‘cloud-first strategies’, ‘systems updates’ and ‘abolishment of legacy architecture’ often overshadow the real issues at hand. Yes, enterprise innovation is essential but the truth is it has become ubiquitous – it needs to form part of the foundation rather than the strategy to get ahead. While it is important to know the lay of the land and the art of possible, investing heavily in cumbersome infrastructural changes in the pursuit of nimbleness can be counter-productive.
We have seen countless clients go through long IT transformation programmes which not only cost a fortune but are also too slow and lengthy to keep up with the current pace of change. Instead, true disruption is being realised by those who are able to implement changes that are perpetual, rather than static. Digital challenger bank Monzo ran a series of Alpha and Beta test cycles, allowing them to constantly receive customer feedback and iterate their product in direct response.
Play 2 – Low risk, high stakes: redefining the relationship with the customer
The emerging digital banks are not burdened by shareholder expectations, profitability targets and expensive cost bases. They have the luxury of being able to focus solely on improving user experience, as their sole customer is the end user – refining the interaction of every touchpoint therefore takes centre stage. Communication is informal, friendly and personalised, which contributes towards redefining the relationship between bank and customer. It is becoming easier than ever to make this dialogue tangible and tailored to the specific situation. In-app chat facilities (notably, an experience not exclusive to startups) allow customers to chat directly with a team member, sharing photos or screenshots. Chat-bots such as The Penny App take this a step further – all you have to do is ask and Penny will analyse your current account data, offering personalised tips for budgeting. Tandem Bank, moreover, are taking redefining their relationship with customers to the next level, through initiating ‘co-founders’, a group of c.5,000 loyal customers they leverage to co-create and help design the best possible propositions and services.
Over the past couple of years, we have worked closely with a large number of corporate clients in the retail banking space to help initiate this shift in mindset, introducing them to new ways of working and methodologies, such as Design Thinking and Rapid Prototyping, which prioritise an iterative approach, centered around customer needs and emotion. One of our biggest learnings has been the need to reduce the chasm that has emerged between those nestled comfortably in head office and the customers they consider themselves to be serving so effectively. Most team members have a preconceived view of what they suppose the customer wants or needs or thinks or feels, but this quickly falls into doubt on uncovering the last time they spoke to a customer.
Play 3 – Abolish the play: breaking down barriers
Another option is to take a stand and abolish the metaphor of competition entirely. Fight back against the ‘traditional’ vs. ‘startup’ dichotomy and instead pursue opportunities for collaboration and co-creation. Our experience across all our networks, in London, Silicon Valley and South Africa, has allowed us to experience and engage in some of the finest examples of realised ‘open innovation’.
In South Africa, for example, what would typically have been perceived as the ‘traditional’ banking organisations are some of the biggest local investors in FinTech innovations. Peer-to-peer lending platform Rainfin was partially acquired by Barclays in 2014 and formally announced a partnership with ABSA in February this year. Similarly, Old Mutual’s PFM app ‘22Seven’, Standard Bank’s cashless, cardless payment app ‘SnapScan’ and Nedbank’s ‘Pocketslip’ are further examples of this move towards a tone of collaboration.
The UK retail banking industry is undoubtedly being disrupted – established players would be naïve to ignore the very real threat of FinTechs. But whilst the landscape is changing, it is by no means too late to defend against the challenge. The key is for banks to embrace customer-centricity – only by shifting to a customer-first culture can banks create the truly compelling customer experiences they need to deliver to remain competitive. UK banks would do well to look at other markets, such as South Africa, where established players are demonstrating their ability to challenge tradition to deliver results.
In our view, the fastest and most effective way to achieve this is through adopting open innovation and co-creating with partners – banks need to look outside their own walls, learn from, and partner with the best. This is ultimately how banks will be able to innovate before the FinTechs can scale. The threat is real, but so is the opportunity.