The banking industry is at a crossroads. Banks can either embrace the digital revolution with all its advantages and risks, or, put simply, fade into oblivion. Given the latter alternative, it’s no wonder that traditional lenders are increasingly turning their attention to technological innovation, and developing new products and capabilities in this respect.
The major driver behind this shift in banks’ attention is a radical change in customer habits. What has brought about this change? The emergence of alternative providers of payments and other banking services, says Jaydeep Korde, Client Principal at ThoughtWorks, a global software design and consultancy company.
Mr. Korde helps ThoughtWorks’ financial services clients shape their engagement with their clients, to better understand how technology can be integrated into their business models, how it can be used to create value for the customers. Technology is increasingly being used as a tool that helps develop and distribute new products, and as a product in its own right. He agreed to share some insight into the new technological landscape in the banking industry with Finance Magnates.
Thanks to the likes of Apple, Google, Amazon, and China’s Alibaba, as well as startups, Korde explains that the traditional view of banks among consumers is changing. Banking executive are starting to worry that their customers are increasingly seeing them as “dark pools of consumer liquidity”, because of the traditional ways in which banks handle their clients’ money. Digital services providers, on the other hand, offer their users a more transparent model, a model that allows them to do with their money whatever they want, and quick, and it seems to be winning.
Customization Is key
“The idea of banks as one-stop shop for all financial services, both in capital markets and in the retail market, is being unwound,” he explains. It’s being unwound by niche loan providers, peer-to-peer service providers that offer better rates and that allow you to be both a borrower and an investor.
The presence of these companies is changing the mentality of customers, who, in the wake of the financial crisis, don’t just require more transparency but also like to enjoy a sense of ownership. Financial services startups are giving them this sense of ownership, unlike banks.
A new generation of tech-savvy, demanding clients
This is a whole new generation of wealthy clients who present a challenge to banks in their own right. This generation is driven by the technical experience it gets from their financial services provider, so the banks should really focus on delivering this experience through apps and other solutions. So, how do they do that?
Generally speaking, banks are in a difficult position. They are still recovering from the fallout of the crisis and they have to contend with a lot of new regulation that is driving their costs up significantly, on the one hand. On the other hand, they have, in their retail business, this impossibility to ignore new competition from alternative financial services providers.
To be fair, traditional lenders are putting efforts into catching up with their fresh competitors. Most of them are heavily investing in technology, says Korde, primarily mobile capabilities. Yet, these efforts may not be enough. The reason is that banks simply have too many priorities on their list, not least among them the cybersecurity issue.
A Security Paradox
On the one hand, retail banking customers want open, transparent services and on the other hand, they want security. Yet, says Korde, “Transparency and security are not necessarily the easiest bedfellows.” The problem is that in the digital world today, simply using an online service, whatever it is, involves sharing data, and the presence of this data can make a person very potentially vulnerable.
Data breaches, unfortunately, are going to become more common and more serious, Korde believes. The good news for banks is that the challenge will be greater for startups, because banks have mechanisms and experience in handling such threats. Be that as it may, they are by no means invulnerable as last year’s hack of JP Morgan has shown. Although there is no way to completely eliminate the threat, Korde believes that both banks and startup finservice providers can benefit if they work on their reputation as advocates of their clients, as virtuous service providers.
Reputation Drives Trust
Speaking of reputation, it is one of banks’ few advantages over the startups that worry them so badly. The reputation, the brand, create trust in customers and keep them coming back, says Korde. Startups lack the long history of major banks, so they need to work harder to win customers’ trust. What’s more, financial services startups are more niche specific, they are commonly focused on a few definite, related, services, while banks have a much more extensive product and service lineup.
“What banks could and should do is learn from the startups”
Aside from continuing to use the advantages they already have, what banks could and should do is learn from the startups. Instead of reinventing the wheel, banks and other traditional financial service providers could utilize the tools and know-how already out there, Jaydeep Korde says. They could also join forces to tackle the new competition, by teaming up to provide new, attractive payments solutions. Like a group of banks are doing in the UK with Paym, a system for mobile payments, but presently on a small scale.
What the Future Holds for Banks
All these challenges are likely to persist for some time. The regulatory overhaul is a fact and banks will simply have to start accepting it. At the same time, however, regulators are also coming to realize the technical constraints faced by the banks in their compliance efforts, which is welcome news for the banking industry.
The issue of cybersecurity will continue to gain further prominence and the inherent paradox is unlikely to disappear anytime soon. What is undeniable, however, is that technology has already taken center stage in the financial services industry, and those players who succeed to leverage all the advantages it offers while at the same time minimizing the risks it carries will be the ultimate winners.