Digital innovation has had a smaller impact on banking than in other industries – at least up to now. Companies in other industries have been much more alert in responding to the innovative disruption from digitisation, if not driving it themselves.
Banks can learn a thing or two from their industry peers. Coming from the financial sector myself, but now as a banking «outsider», I reflect on seven essential questions that are relevant for every banker.
- What will not change?
In a world where everything changes quickly and unpredictably, it may be better to look out for elements that are not changing as a basis for building a sustainable business model. For example, many of the underlying demands of clients remain unchanged, including a desire for high service quality. The most innovative digital customer interface would be useless unless it delivers excellent service quality. Banks have longstanding experience with satisfying client demand, quality client contacts, strong regulatory expertise and a stable infrastructure (even if this is partially outdated). They hold many valuable cards; they ‘just’ need to play them well.
- What does my client really need (and what not)?
The short answer to this question is: A product or service that is well delivered and well presented.
In the banking industry, service quality remains a core requirement, despite cost and margin pressures. However, the way banks deliver their services is changing. In the past ten years, the number of physical bank branches in Switzerland has declined by 13 per cent – and in the US they have fallen by almost half! – as retail customers are flock online to satisfy their need for money transfers and investments. In fact, they are not only moving to online banks, but are also looking outside the traditional banking world for financial services, i.e. anywhere they have a positive user experience.
It’s no secret that client centricity is becoming even more important. But client centricity is not all about digital, as many clients still prefer non-digital banking services. And those that want digital services are not automatically satisfied with anything digital. If you make an app, for example, you should make it because your clients want it and because it can be useful to them, so that it is not just an app for the app’s sake.
- How can I disrupt my own bank?
If there is a way to disrupt your bank, it can be done. Many blockchain start-ups are moving into financial services, for example Lykke, which offers trading solutions. In response, a group of major global banks has established the R3 consortium which aims to build themselves a new blockchain-based operating system for financial markets. It is better to steer innovative disruption in your bank yourself than to be disrupted by external parties. But use disruption wisely: Disrupt where it is necessary or useful. Instead of rocking the entire boat – where the outcome would be uncertain – and consider ‘scaling edges’. Identify promising new business areas, set up separate entities at the edge of your current business model and let them grow. Some may fail, but some may succeed and become the future core business of your bank.
- Who will be competing for my margin?
Boundaries between traditional industries are becoming blurred. For example Google probably has no appetite to compete with the traditional automotive industry by building cars, but it will compete for the profit opportunities from the mobility industry by adding intelligence to cars. As a consequence, the traditional car manufacturers are at risk of becoming a commodity hardware supplier to Google.
The tech giants such as Google, Amazon and Apple are all becoming involved in the financial services industry. For example, Apple launched Apple Pay in 2014; a next disruptive step might be that Apple no longer relies on third party credit cards but starts offering its own. Digital payments are still a niche market sector, but it is growing strongly in Switzerland, where Apple is already the second biggest player in retail digital payments. (For more about this, see Deloitte’s latest study on the topic Good bye wallet, hello smartphone). Other players such as Samsung and a number of fintech start-ups are also joining the fast-evolving competitive landscape for financial services. Banks have a competitive advantage as incumbents here since credit cards and digital payment accounts still run via traditional bank accounts, but they need to exploit their advantage and make (better) use of it.
- Why would I grow only 10 per cent if I could grow ten-fold?
In a world where new business models can and (given the narrow margins) have to be scaled quickly, banks should ask themselves how they can grow their business exponentially. The example of German mobile banking-only start-up N26 demonstrates that thinking big is also possible in Europe. N26 is not only customer-centric, but since its launch in 2015 has already expanded into 17 European countries as a fully licensed bank.
Aspiring to exponential growth will open your mind to becoming creative. Growing the entire business of the bank exponentially might not be possible for large, established banks, at least not in the short term. But this is where ‘scaling edges’ comes in. Many banks can invest in promising new business areas and grow them exponentially. In time, they may evolve from a niche part of the business to a core activity. A good example is mBank. First founded as BRE Bank in 1986, mBank was launched as the first internet-only bank in Poland in 2000, and subsequently became such an important part of the bank’s operations that in 2013 the whole group was rebranded as mBank.
- Do I have the right personnel to be successful in the digital world?
Studies show that social competence, creativity and a strong affinity with IT are essential in the digital age. Of course, we will also need to be willing and comfortable to take on more (self-management) responsibilities and to think cross-functionally.
Clearly, banks need to have effective talent management in place, to find the staff they need. They also need to invest in their existing workforce with regular soft and hard skills training, and also in further education programmes.
- If I were Elon Musk, how would I re-invent my bank?
Elon Musk has re-invented the automotive industry, evolving the car into a piece of software with wheels, in contrast to the traditional model of four wheels and a chassis. Data, and more importantly the insights derived from data, will be a key source of profit in the future. This transformation will apply in banking too. Clients and client relationships – and clients’ trust – will remain a core element of banking services. Data is a complementary business, but trust will be essential here as well, and the challenge will be to utilise client data in a way that benefits both banks and their clients without compromising clients’ trust.