Over the last five years, retail banks have had to completely change the way they think. Access to technology has forced a shift to a new retail banking model where it is no longer enough to simply digitize previously manual processes. There is now an unavoidable need to think about what customers actually want and require, and to use technology to develop services that meet those needs. These are the questions that the challenger banks such as Revolut, Monzo and Starling, have been successfully addressing more recently.
The high street banks that dominated the market in the second half of the 20th century, where innovation was limited, have been catapulted into a data-driven era where they cannot rely on brand loyalty to survive. So, what does today’s market look like and how can traditionally strong organizations ensure they play a strong part in it?
The retail banking landscape
There are four key elements that are disrupting today’s high street banks. Digitization, regulatory challenges, a changing consumer mindset, and maturing product lifecycle. The first two of these in particular, are combining to reduce the competitive advantage that traditional players once held.
New technology has reduced the cost of operating as a business in the sector which, in tandem with regulatory easing, means that a wave of new banking licenses are being granted. A sudden rise in challenger banks (or neobanks) has been a phenomenon globally across the Americas, Europe, and Asia. The efforts have not been token and investment has been rewarded, with substantial customer acquisition keeping traditional banks worried.
The next paradigm shift in retail banking
It isn’t just challenger banks that will play a role in the future of the market – the big internet players like Google, Apple, Facebook, and Amazon are already dipping their toes into offerings associated with traditional banks. The introductions of Apple Wallet and Apple Pay are serious statements of intent and facebook has also thrown a jab with its launch of cryptocurrency Libra. But why can these businesses make such a strong play in the sector and what challenges do they solve that retail banks have to be aware of?
The big technology firms can enter the market with significant advantages already at their disposal. Not only are they not constrained in the ways that both traditional and challenger banks are, they are already ahead of the game when it comes to several key aspects. Their strengths include:
- Unprecedented customer base access – beyond traditional definitions of a banking customer
- Ubiquitous integration – customers can make payments with the minimum of effort in the way that they want, thanks to technology already being installed on their phone
- Network-effect – the future bank will be able to defend itself from the competition by offering incentives to those already in their network, premium services for existing customers and proprietary technology
- Customer loyalty – driven by the popularity and necessity of wider products and services offered, these brands do not need to put in the hard yards earning loyalty from scratch – they already have it
- Existing ecosystem – they can use current relationships to their benefit, for example with payments networks, or integrating authentication technology with existing seamless solutions
- Cash for investment – these tech giants can commit huge resources to investment and development, beyond the reach of existing banks
How traditional banks can still compete
Set against this backdrop it looks a challenging market for traditional banks to prosper in. But it isn’t impossible. For existing banks to survive, they will have to transform themselves from the organizations that we recognize today. An essential part of this will be taking full advantage of the huge volumes of data at their disposal rather than drowning in it. There is the chance to not only identify new business opportunities related to what customers want, but also to apply this insight to develop new services ahead of the competition. They have to become the disrupters, not just react to change.
The COVID-19 crisis has also caused issues for challenger banks which may provide some breathing space to catch up with best in class consumer solutions. In testing times customers have moved away from the neobanks to transact more with traditional banks – regarding them as safer. Profitability is also being tested and this has resulted in exits from the UK market (N26), closures altogether (Bó by RBS-owned NatWest), and reduced investment and valuation (Monzo).
Traditional banks should leverage the trial and error investment witnessed by the new-comers and learn from their successes. A whole new set of offerings and solutions are now on the market as a result of the challenger banks. The new solutions aren’t just banking products but they are ways of working, communicating, and building customer trust and rapport. Traditional banks need to look at the end-to-end operating model of challenger banks and ask “what are they getting right that we aren’t”.
An example of this may be the risk management and decision-making processes. Challenger banks run scalable organisations which can support a customer base equivalent to a high street bank. While they have increased their customer count they have managed to keep their team sizes to a level which allow fast and effective communication. Risk-based decision making also has a higher velocity as the decision-making network is small and empowered. Conversely in a traditional bank you would typically see multiple hierarchies of sign-off mixed with a distributed and unempowered approval processes which slows down and suffocates all chances of growth and innovation.
Customers are now more technology-driven and many are far more willing to switch bank accounts given the ease with which it can now be done. Relying on customer loyalty is not a sustainable strategy and any high street bank that relies on this can only be certain of failure.
Taking action now while the challenger banks are occupied with other challenges and constraints offers an excellent opportunity to get ahead of the competition. Building relationships and welcoming the big internet firms’ ecosystems is the best strategy to stay ahead of existing competitors.
One thing’s for sure more than ever, that retail banks that rely on strategies of yesteryear will be left behind. Those that leverage their existing brand while enacting a vision which is proactive and adaptive to new market forces will harvest a massive and unprecedented market opportunity.
Stuart Heyworth is a Digital Transformation Consultant and has been working in Financial Services in London for the past 10 years. He holds an Executive MBA from the University of Cambridge and has undertaken Digital Transformation engagements with Deloitte, Lloyds Banking Group, and HSBC. His experience includes leading organisations to build retail banking apps and leading large organisations to overhaul core banking platforms. Stuart is available for contact by Linkedin.