As we head into a new year, incumbent banks face challenges that are at once familiar, yet more pronounced than any time in the past decade.
On top of regulatory reform, capital requirements, compliance costs and ongoing global economic uncertainty, banks find themselves in a rapidly-evolving digital landscape marked by increasing competition and a proliferation of risks around how they develop, deliver and drive more timely and relevant products and services.
The challenge for listed banks was underscored by the European Banking Authority’s latest Risk Dashboard published last month, showing an average return on equity of 7.2% as of June 2018. The report noted that costs related to outages, failures of old legacy information and communications technology, and costs related to IT migrations were contributing to the drag on banks’ profitability.
Against this backdrop it was not surprising to see European bank shares have their worst year since the peak of the Eurozone crisis.
In all fairness, incumbent banks are not standing still and they have innovated on a number of fronts. But 2019 needs to be the year of fundamental transformation, a chance to cross the divide, to empower banks to offer the products and services customers really want in the digital age, or they may soon face their last chance to do so.
Banking on status quo is not enough
For any business, the customer is key. While retail bank customers are not switching their accounts en masse as quickly as many have expected, signs of change are on the horizon. Despite incumbent banks recently offering a raft of incentives to attract new customers, challengers, disruptors and new players are providing offerings that are capturing considerable new business. Monzo, for example, now has more than 1 million customers in the UK; Starling aims to reach that milestone this year; and Marcus – the relatively new online bank from Goldman Sachs – has attracted more than 2 million customers and taken in nearly $30bn in deposits in a matter of months.
Looking beyond the coming year, a recent PwC report – Financial Services Technology 2020 and Beyond: Embracing Disruption - predicts that up to 28%of businesses in the banking and payments space face disruption risk by 2020.
In an effort to bolster their position, many financial institutions have taken steps towards delivering services using an app-based approach to customer engagement – integrating a digital front-end layer into their existing technology. Though a step in the right digital direction, it does not fundamentally address the legacy challenges banks face at a time when customers are looking for ever-better rates and compelling offerings that more closely meet their needs of how, when and where they manage their money on the move.
Data and Directives
Financial services at their heart are data-based businesses. With their scale and the amount of data they hold, transforming the process through which data is managed and converted to insights is a major opportunity. With a growing ecosystem of adept data handling companies, banks have sought relationships with those companies both big and small: the banks have the clients but want the tech, while the start-ups have the tech and need the clients.
There is also the regulatory dynamic to consider.
A year since its introduction, PSD2 – the EU’s banking regulation to enhance consumer security rights, data portability - and Open Banking, the UK’s version, have yet to be fully embraced by industry players. While many have scrambled to ensure they’re in compliance with the regulatory framework, too many seem to see this requirement as an obligation rather than an opportunity. That will change.
PSD2 effectively offers a springboard. Integrating other providers and offering customers data portability, for example, can be a major competitive advantage. Forward-thinking business leaders will use such opportunities to gain support for end-to-end digital transformations at their organisations. Slow movers who have sought to comply rather than transform may soon discover they’ve been outflanked by their peers – challengers from within and beyond their existing competitive landscape.
Whether fuelled by the consumer, technology or regulators, transformation is coming. I believe the digital era has ushered in a watershed moment for the entire financial services industry. Competition is stiffer, operational threats are higher, but in this period of transition, the opportunity to lead has never been greater.
A new year means new beginnings - this should include establishing a new roadmap towards real digitalisation. Migration to the cloud presents a unique opportunity to redesign a bank’s architecture - it is the system at the core that becomes the anchor for a new design. Banks do not just need a new platform, they need to transform how they deliver. Without new ways of working, transformation will not happen. The tools are on hand and cloud technology is at the heart of this revolution. The choice for banks, however, remains whether to cross the divide or not.
Recognising and addressing the challenges will require new approaches, impacting how we bank, pay, buy, and how we work. Get this right, and a better financial future for all beckons.