Future of Digital Banking: Sustenance or disruption?
Banks should not be blind-sided by sustaining innovation. A large part
of Digital Initiatives within the Banking Industry focus on Incremental
Innovation. It looks at using technology to deliver existing services cheaper
and faster, sometimes better. Instead true disruption comes from addressing
the customer Needs better.
Technology always creates conditions that disrupts industries. While the concept may be relatively new to the Banking & Financial Services Industry, industries like Retail and Travel are great places to learn about disruption and coping strategies.
Disruptions may occur due to
- A new business model (like low fare carriers)
- A new technology or (like Apple iTunes)
- A new Technology allowing a new business model to become viable (like offshore Back-Office work)
It is not an event but a process usually unfolds over a period.
Retail is great example. It went through this disruption at various points in the last two decades – and it is not yet over. Books, Music, Media and Travel were the first few to undergo this transformation. As consumers got used to buying online and retailers optimised their supply chain, Apparel followed, and now it is the turn of Grocery. We believe that Banking is starting on this journey now and will be significantly change in next five years and be drastically different in 10.
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| Share of online commerce in retail by category |
What usually disrupts businesses is usually not incremental innovation, but ideas that change the playing field by addressing the core need of the customer cheaper, faster or better. Superior Bandwidth changed the Movie Business but completely disrupted the Video Rental market. Studios still make money from the Theatres. Theatres still exist but possibly make more money from popcorns & candy. Revenue models created an entirely new segment of programming called, ‘Reality TV’ – one that is cheaper to produce. What has not changed is that people still want Entertainment.
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| Netflix, Movies and Reality TV all have their place in the Entertainment Industry - with their unique business models |
In summary,
- Technology allows changes that fundamentally changes how people buy from you
- The role you play (or can play) in fulfilling that need
- It begins at either end
Disruption usually begins at both ends: high-profile changes, which
fundamentally change the way people use your service e.g. Apple and Google
eating into Nokia’s business. Small-scale changes, which, start eating your
products and services with the smallest margins (e.g. low-cost airlines
targeting young leisure traveller).
Dis-intermediation
With the advent of new completely new technology, i.e. internet the people were able to initially book directly. As the internet booking took hold, they were able to compare prices and book from someone who provided the best value. This completely disrupted travel agency work who relied on a commission and a fee to find and resell the best value. Direct connection between the buyer and the seller took the intermediary away.
It also allowed disruption at the low-end of the market. Low-fare companies took hold because they could sell directly to the consumer and reduce advertising costs; operated on a model that allowed them to operate efficiently e.g. only served point-to-point (never connections, and therefore no missing bags) or flew into cheaper airports. Once they conquered, this they have then started to attack segments with higher margins i.e. Business Traveller.
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| Disruptive Innovation happens at either end i.e. high-end disruption and low-end disruption |
If we apply disintermediation in the context of Banking, following companies are attempting to disrupt the lending market:
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| A variety of fintech startups are chipping away business through a sharp focus on specific customer segements |
- CommonBond provides student loans at 1-1.5% lower rates of interest.
- TradeShift is providing real-time Bill Discounting by releasing money against accepted invoices. These invoices are credit-checked, real-time, against the credit rating of the Buyer (which is usually a larger business) than Supplier (which might be a SME/SMB).
- Zopa – a UK firm – offers 4.9% to lenders and charges 5.6% to borrowers – typically.
- Bondora a peer to peer lending firm promises 22% ROI for investors
- Currency Fair promises money transfer at better rates than banks
Question is what roles Banks can play in this space – which potentially threatens one of the cheapest sources of cash and one of the profitable sources of income. Regulators have already stated to take notice of this space. Some Banks and ex-Bankers are participating as investors and lenders. It is such a fantastic opportunity for Banks to connect two customer segments i.e. Retail Investors and SMB. However, if banks need to address this segment, they will have to rethink their credit-risk policies along with the IT systems that will address these.
Value vs. Convenience (and the rise of the new intermediary)
Let us talk about three companies that you possibly might have used within the hour of leaving your home this morning: Transport for London, Starbucks and Apple. It is also very likely that you have loaned a sum of money to these two enterprises and possibly at zero interest. I am talking of Oyster, iTunes account & the Starbucks Rewards Card. Apparently, there are vast sums of money loaded in these accounts or cards. Estimates suggest that there is £100m of just unutilised funds in the 52 million Oysters in circulation.Starbucks launched a limited edition rose-tinted metal card worth $450 each and sold 1000 in matter of seconds. These are being resold for $1300 on eBay. Put together, 7 million Starbucks user use it 4 million times/week and had $4 billion (company revenue is $14.9 billion) loaded on it in 2013. These are staggering statistics. It is larger than the GDP of a small nation.
Loss of customer intimacy:
This leads to two points, People prefer Convenience over Value when it comes to daily transactions. They would rather have this money on a card than in a bank; second as the physical and retail environments mature digitally – iOT included – more companies will start owning information that’s generated by the consumers, their buying behaviour and banks will become secondary. There is no reason why Banks cannot create such loyalty platforms that bring the merchants, consumer and payments together.
Should customer experience be the new measure of performance?
If you look at the data coming out of the Current Account Switch service, you would have noticed that the biggest gainer is Santander – possibly given their media push on the 123 Current Account Service and the cash back it offers. Another way of looking at ‘Rewards’ is that this is effectively discounting. Discounts are usually an indication of commoditisation and that consumers do not distinguish between the value propositions. It is a downward spiral.
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| Current Account Switch Service is prompting customers to leave banks because of poor customer service. However, the biggest gainers are the ones with cash-back incentives - a sign that banking has become commodity |
For example, 51% of fast-moving consumer goods in UK moves on deals. When faced with commoditisation, businesses always reinvent the product with a focus on performance. If you look within the Consumer Packaged Goods industry the anti-aging creams, three-blade razors, fortified milkshakes, are all examples of this.
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| 50.4% of consumer packaged goods moves on deals and discounts |
Going back to our travel industry example, as people got used to the lowest prices and as the operations wrung dry from doing things cheaper and faster, some companies started to focus on doing it better. They started to look at providing better customer experience. Companies are looking at the entire Customer Journey to see how they can make it stress-free – and not necessarily when the customer is with them. Let’s look at two examples:
Marriott Red Coat: Marriott looked at their customer journey from the point people leave home to their return, and how to make it stress free. One of the initiatives they rolled out is ‘Marriott Red Coat Direct’. Red Coats are Marriott Concierges. When hotels host events, the organiser is the busiest. As the event progresses, there are a host of requests that need to go to the Red Coat like, Coffee, Water, Lunch to be delayed, room be made cooler/hotter. They created an App that routes these to the concierge and acknowledge on completion. This in turn interacts with a host of systems like the kitchen, housekeeping, engineering etc. The best bit about this is that the customer is at the heart of it. It designed to allow existing employees serve the customer better and not aimed to reduce the workforce.
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| Two Tales of Digital: British Airways launches hardy Permanent Bag Tags while Virgin Atlantic checks-in people with Google Glass. You decide which one is more useful. |
Sinking Ladder
In conclusion, most disruptions begin as what I would call as the Sinking Ladder. These start small at the bottom and slowly inch their way up – taking away more customers and more profitable customer segments at a time.
Master the Duality
It is vital for businesses to focus on what keeps their world spinning (like mobile access to account balance) but also where it is going i.e. the longer-term changes that will truly disrupt the bank. Banks need to answer how they can address the customer needs better, faster and cheaper and not how they can deliver their existing services cheaper, faster and maybe better. Some of these would require a complete rethink of People, Process and Policies.
Thank you.
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