Why traditional banks risk becoming invisible in consumer markets

  • Posted on October 16, 2019
  • Estimated reading time 4 minutes

The financial world is changing – arguably faster than ever before. This change is driven by an insatiable appetite for technology and innovation, which has seen experiences and expectations evolve beyond anything we could have predicted a few decades ago.

Just think about our everyday lives. Today we think nothing of ordering a pizza via our smart speaker, phone or watch, which subsequently and automatically authorises a payment. All without any direct contact between ourselves and our bank to complete the transaction.

This simple example is just one experience we now take for granted in an increasingly connected world – one that’s transforming every industry at a dizzying pace. And nowhere is that evolution more profound than in the financial services sector.

Banking without banks
In financial services and particularly banking, regulations like PSD2 and the Open Banking initiative are fuelling huge changes, opening the industry up to unprecedented disruption and opportunity.

When combined with intelligent devices, the cloud, AI and related technologies, these new regulations are enabling bold and brave new experiences for customers and organisations alike.

Personal financial management applications (PFMs) can now automatically assess and report on a customer’s financial situation. Open APIs then enable new connections between financial providers which allow money to move, charges to be reduced or interest earnt on savings to be maximised.

Indeed, going forward it’s anticipated that many PFMs and other service providers will evolve to offer non-financial services too – integrating with retailers, taxi firms, restaurants and more to deliver more intelligent services that use cloud-based machine learning to augment consumers’ lives.

Tomorrow’s financial world has already arrived
Large US retailers are exploiting the opportunity afforded by Open APIs, the cloud, AI and new regulations in financial services. For example, through the Apple Card (powered by Goldman Sachs), a cashback card and its broader ecosystem, Apple is delivering its own PFM proposition.

Amazon is also expanding further beyond its core business focus with a credit card offering. Even Uber is getting in on the act, launching banking services for drivers who may have struggled to get mainstream financial products in the past.

Why banks need to respond
This trend should concern traditional financial services providers for two reasons.

Firstly, these retailers own the customer. And customers can be fiercely loyal to certain providers. Just look at the queues outside Apple stores when a new iPhone is launched.

Secondly, customers don’t really have much (if any) relationship with the eventual financial services product provider. Do many people know (or care) that an Apple card is provided by Goldman Sachs? Effectively, the big brand retailers are disconnecting the customer from the true supplier. Apple et al are ultimately providing banking services while eliminating the need for a traditional bank – in the consumer’s eyes, at least.

The implications for banks
These scenarios – whilst small in scope today – are still significant and the possible threat posed to traditional financial providers cannot be underestimated. Technology makes the move from a simple PFM or retail provider into fully functioning bank relatively straightforward for any institution with the customer base, infrastructure and the inclination.

Effectively, banks are in danger of being removed from the consciousness of the consumer altogether if they do not respond or counter these moves.

So, is the future for traditional banks and financial services providers a desperately bleak one?

In a word, no. Clearly, they still have a lead over many of the new challenger brands in terms of the wider marketplace beyond retail offerings. However, if they do not respond to the threats posed by retailers and more customer-centric challenger banks, then they risk becoming increasingly irrelevant to the consumer for day-to-day banking.

How to respond
Customer relationships have, arguably, been taken for granted in the past. To respond, core banking platforms need to evolve to support a range of new propositions and create compelling experiences.

But many banks are running on inflexible legacy processes and systems right now, with channels tied to siloed platforms. Most recognise the need to digitally transform, but the engrained legacy is constraining their ability to do so.

This is opening the door to new market entrants – heavily backed start-ups like Monzo, Starling and Atom bank have already made inroads into a seemingly crowded marketplace. And they’re not lacking in confidence – a number are already targeting the US market, such as German firm N26.

Banks need to be clear on their roadmap and the experiences they’re seeking to compete on. They need to modernise their back office, taking advantage of the cloud and capitalising on APIs while harnessing their heritage. All the while adopting more agile development practices.

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