Challenger or Challenged? Where do you fit in the banking industry?

The banking sector is under increasing pressure. Significant regulatory changes, coupled with increasing competitive pressure from challenger banks and new market entrants not normally associated with banking, is creating a perfect storm and exacerbating the need for urgent digital transformation. 

This is nothing new for the industry as banks have been championing the multi-channel customer experience for longer than you would think. The first UK digital banking platform was provided by Bank of Scotland to customers of the Nottingham Building Society in 1981. Banking over the telephone has been conducted for years and of course, the branch network has always been available. Ironically the result of this early adoption of digital systems is now a significant barrier to innovation. Deployed in the days when IT was not particularly agile or scalable, this type of legacy IT is now constricting the banks' ability to quickly create new products and services.

Next generation banking for the next generation

Consumers’ financial needs are also far more advanced that they used to be. There is now a whole generation of 'one-click' customers who interact with their banks digitally, using mobile banking apps and the internet. In fact, as we move beyond 2020 we expect to see 85% of financial transactions being completed and processed without any human interaction. This means that the traditional banks need to embrace innovation, reduce time to market for new products and collaborate with each other, and their technology partners, like never before. Legacy infrastructure has become a dead weight when it comes to adopting new practices and launching new innovative initiatives, such as open banking. Who stands to take advantage of the slow pace of transformation? 

Enter the challenger bank. Not bound by legacy infrastructure and structured in a way that is more akin to a software company - think uber-for-banking - they are very well placed to meet the needs of a client who is more sophisticated than ever before. A client who expects to see their own financial ecosystem in one pane of glass. A client who doesn't need, nor want, a bank branch. By not having a branch network, the challenger bank has a much lower cost base from day one. By not having a branch network, the challenger bank can try new services, launch new campaigns and change its direction almost instantly if it doesn’t achieve its customer and marketing objectives.

 Arguably, their size works against them, their overall market share low as their business is still very much embryonic. They are fighting in an already crowded market place. In addition, targeting a sophisticated client, one who doesn't need to visit a branch does not always translate into a new client for the challenger. While consumers are becoming 'less sticky', loyalty to their bank remains relatively high due to the perceived complexity around taking their business elsewhere. As such, there are other players out there who not only pose a threat to the traditional banks, but also to the challenger banks themselves.

 Banking on your retailer?

Enter Amazon. Singularly the biggest challenge to the banking sector since time began. Already they have a very large customer base and have diversified from an online book store, to a fully-fledged retail business, to an IT Managed Services Provider, to a Supermarket with a few more evolutionary diversifications in between. Their recent exploratory partnership with JP Morgan is a significant shot across the bow of all those in the Financial Services Sector who have yet to pick up the pace of their digital transformation. Amazon have spent years developing complex algorithms which help them drive engagement with their customers. This has resulted in deeper customer penetration and a larger share of customer wallet. It's not a particularly large leap of faith to assume that this way of doing business can be easily repurposed into a drive into retail banking. In fact, this software-centric approach could be applied to any large holder of Data such as Facebook, Twitter or PayPal. 

To summarise, there is much work to do no matter which bracket you fall in to. The traditional banks need to do more to keep up with the challenger banks. Amazon is still very much at the beginning of its journey into Financial Services and needs to learn how to apply its algorithm. Its exploratory partnership with JP Morgan shows just how embryonic their project is. What we can be sure of is that the consumer will always evolve therefore so must the banks' way of engaging them.

The right technology is fundamental. However, finding the right partner is the single most important thing when it comes to having a successful program which can meet the banking needs of clients for years to come. Less need for human involvement in transactions moving toward 2020 does not necessarily mean no involvement. By embracing innovative technologies such as Distributed Ledger, Quantum Computing and Neural Networks financial institutions can foster deeper, fuller and richer relationships with their clients.

If you’d like to know more about how I can help please get in touch: 

Mark.McAlpine@SopraSteria.com