Bank 4.0

by Brett King

  Figure 5: Illustration showing banking access today through non bank-owned or bank-controlled channels.

  AI service providers

  Facebook, Apple, Google, IBM and Microsoft are all spending big time on AI research and development, which is resulting in technology companies leading R&D spend globally today. Since chief executive Sundar Pichai took over the top job at Google in 2015, Alphabet has spent $30 billion on AI and related infrastructure, which includes the data centres necessary for the computing power that makes Google Assistant function as well as its cloud computing division and AI-backed consumer hardware lineup. Clearly we won’t see banks spending at this level on AI, but even if they did, they wouldn’t have the broad reach that Google might have, for example. This means that if you want to plug your bank into an AI service layer that your customers are using daily, it won’t be a bank-specific AI. Today, the entire US banking industry is spending approximately 1–2 percent on AI research and development when compared with the tech sector. The math is fairly straightforward.

  Figure 6: Tech companies taking the lead in R&D spend (Source: Factset).

  Venture capital structures

  If you’re going to be investing in FinTechs you can create your own VC capability, such as those that BBVA, Citi and Santander have done, but that requires some pretty deep pockets, likely north of $100 million to be really serious. If you’re not a global banking player, this is going to be pretty difficult, but there are options. Increasingly, smaller banks are joining as limited partners or strategic investors in FinTech-themed VC funds, such as the fund created by SBI Group (previously known as Softbank Investments) or Anthemis Group. This puts them in a network of like-minded investors and gets them access on a priority basis to the individual FinTechs in the portfolio.

  Ubiquitous banking

  As the shift towards embedded banking becomes complete, the leading banks won’t be those with big distribution networks, they’ll be the banks with broad data capabilities that generate advantages in contextualization of day-to-day banking. Increasingly that will take not only a purposeful shift toward redesigning the way the utility of the bank fits in the lives of customers, but also a massive commitment to partnerships with non-bank partners that have the access or data to make a real difference in a real-time bank offering.

  As a bank, recognising that you can no longer be the primary financial institution by waiting for a customer to “come to the bank” will allow you to start thinking about how to design compelling interactions day-to-day that make your particular set of capabilities indispensable to your customers. Becoming the primary financial experience for your customers won’t be through products, people or even channels—it’s all through anticipating and delivering experiences, when and where the customer needs it the most. The era of ubiquitous banking is almost upon us, and that means that banking will be embedded in the lives of your customers, but not banking as we know it today.

  Endnotes

  1Source: Various—AT Kearney, Forrester, Kitchenman.

  2Source: Digital Banking Report/The Financial Brand (March 2017).

  3Source: British Bankers Association.

  4Go back and read the last section of Chapter 7 on AI if you identify with this.

  5Source: BankRate.

  6Source: MagnifyMoney compilation of FDIC filings from the six largest credit card issuers (May 2017).

  7This is not a new concept—Ron Shevlin has spoken about this previously.

  8“The Great Rebundling of Financial Services”, by Marc Hochstein and Bradley Leimer, BankThink, 13 October 2015.

  9Source: World Economic Forum Press Release—“Canada to Test Advancements in Biometrics and Blockchain to Welcome International Travellers”, Jan 2018.

  10Certainly Mark Zuckerberg, anyway.

  11“Data Brokers: A Call for Transparency and Accountability”—Federal Trade Commission, 2014.

  12Yes, I know there are more cloud providers than this.

  13I know he’s retired from WWE. I still wouldn’t take him on…

  14Source: “Big banks on notice that they’re losing ground to China’s fintech giants”, South China Morning Post, 9 August 2017.

  The success of e-commerce, P2P payments, Uber and digital voice assistants all have a significant commonality—they provide an experience that simplifies daily life. With consumers using their smartphones and digital apps more than ever, winners in the future will be those organisations that can create embedded, contextual digital experiences that don’t rely on physical channels.

  The modern consumer doesn’t have time to visit a bank branch (despite some saying they still want them around). They don’t want to sit through a new account-opening process, meet with an investment advisor, write a paper check or pull out a debit or credit card. They want simplicity in their life that can be achieved through the application of advanced analytics (AI), digital delivery and real-time personalised recommendations.

  Modest-sized FinTech firms and large tech giants continue to make retail banking inroads worldwide, providing services that leverage the best in digital technology to deliver a customer experience that removes cumbersome steps from both routine and more involved banking engagements. Relative financial newcomers like Alipay (China), WeChat (China), Rakuten (Japan), Atom (UK), Monzo (UK), Starling (UK), Moven (US), N26 (Germany) and Revolut (UK) have joined household names like PayPal, Amazon and Google to disrupt the banking ecosystem, leveraging modern infrastructures and innovative cultures.

  Many of the tech giants possess the ingredients of success: digital prowess, large customer bases, organisations well versed in improving the customer experience, and ample leeway to extend their corporate brands into banking.

  —Bain & Company, Evolving the Customer Experience in Banking

  More concerning may be that some of these firms are generating a level of trust previously reserved only for traditional banks and credit unions. As a result, an increasing percentage of consumers are willing to use financial products offered from these non-traditional firms—especially where the experience is superior to that offered by legacy organisations.

  Figure 1: Technology companies like PayPal and Amazon are trusted almost as much as banks (Source: Bain & Co).

  Going beyond digital banking basics

  At a time when some of the most complex interactions—such as starting a business, applying for an auto loan or home mortgage, sending money overseas and building an investment portfolio—have been digitized, it is more important than ever for traditional financial institutions to digitize entire engagements, especially the opening of basic banking accounts. This will take a complete revamping of most banking websites, mobile banking apps and back-office processes.

  Migration to digital makes excellent financial sense. For example: routine transactions that require bank staff not only cost 20 times more than those done online or through mobile, but consumers also prefer to handle routine banking business digitally. For instance, while “self-serve” leaders in the Netherlands, Poland and Australia transact the vast proportion of their transactions without ever interacting with a human, 40 percent of US respondents still go to the branch teller at least once a quarter to make a deposit, compared with 21 percent using digital channels and 18 percent using ATMs. Even within geographic markets there is a significant gap between the leaders and laggards in the quest for digital optimization.

  For those who say that the migration to mobile banking and the use of some digital services appears to have levelled off, this is more a reflection on the inability of most financial organisations to improve their digital capabilities, rather than consumers not wanting something better. The bottom line for banks is the challenge that consumers expect even better experiences in mobile banking apps, digital payments, robo advice, and voice banking. This only seeks to increase the likelihood of non-traditional competitors getting a foothold over the next few years.

  Banks and credit unions must begin to explore emerging technologi
es that leverage consumer data, advanced analytics and new digital tools, such a voice-controlled digital assistants. Research shows that 25 percent of US respondents said they use voice assistants such as Siri, Alexa or Google Assistant on their smartphones or Alexa or Google Home at home. And, while only five to six percent of respondents currently use voice technology for their banking in the US, Australia and the UK, between 20 and 25 percent-plus are open to trying the technology for their banking in the future.

  Banks that master the digital basics will be able to further secure customers’ loyalty by quickly putting the new technologies to practical use in test-and-learn prototypes that can be improved in a few iterations and then broadly rolled out. In determining which new technologies should be rolled out, financial institutions must look at the options from a consumer benefit perspective, as opposed to simply as a way to reduce costs.

  Figure 2: Share of customers using voice for banking is expected to rapidly increase (Source: Bain & Co).

  Amazon model provides a guide for banking

  There is no denying the explosive growth and competitive impact of Amazon to the retail industry. For their retail business, the foundation of this success is Amazon Prime. Amazon’s Prime membership program has 80 million members in the US according to recent estimates from Consumer Intelligence Research Partners (CIRP), up from 58 million at the end of Q1 2016. Today, that means that 64 percent of US households now have Amazon Prime memberships.1

  While most casual observers would think that the increased loyalty around Amazon Prime is about free shipping, it is really about changing consumer behaviour through reduced friction.

  Reducing friction to radically alter behaviour is what was behind one-click ordering, Super Saver Shipping (encouraging customers to fill their shopping cart) and the entire family of Alexa devices (using voice commands to simplify ordering). Reducing friction and improving the consumer experience is also what is behind the recent decision to acquire Whole Foods.

  Core to the Amazon strategy is the company’s infamous Flywheel (pictured below). The Flywheel, dubbed as “The Virtuous Cycle”, was created before Amazon added business segments in addition to its retail marketplace, such as Amazon Web Services.

  Figure 3: Amazon’s Flywheel (Source: The Financial Brand).

  Looking at the original Flywheel, it is evident that all the pieces revolve around a continuous improvement of the customer experience. A strong customer experience will lead to more shoppers, which will in turn bring more sellers. More sellers will lower costs and prices through competition while bolstering selection for customers. Lower prices and more selection will bring in more customers—and the cycle repeats itself.

  As the Flywheel increases momentum, there is massive amount of customer insight being collected, analyzed and acted upon for improved recommendations and behaviour modification. Instead of collecting data for great internal reports, Amazon applies all of the learning (in real time) to enhance the customer experience and increase loyalty.

  Due to the breadth of the Flywheel effect across the business, they realise an additional advantage. They can make lots of small bets at the fringe of the Flywheel. Meanwhile, the core business continues to be healthy.

  The bottom line is, Amazon Prime wins by making life easier for its customers. By providing a comprehensive selection of products, accessible with only a few digital clicks and taps, at competitive prices, the brand experience is reinforced. We are already seeing the same impact in banking. The largest banks (Chase, Bank of America, Wells Fargo) are gaining market share by reducing friction over digital channels.

  Allowing for the end-to-end digital opening of new accounts using a laptop, tablet or phone removes friction from a previously arduous task. Providing voice access to balances, basic transactions and customer support sets a financial institution like Capital One, USAA and others apart from the competition. Using artificial intelligence (AI) and a customer’s habits and financial activities to predict future behaviours and needs will be the foundation for future banking relationships.

  Amazon is setting the bar for customer expectations beyond the retail industry. The banking industry can learn from Amazon Prime. Or, it can allow Amazon and other large tech companies to leverage their exceptional customer experience layer to provide many of the banking services legacy organisations provide today.

  Open banking: a digital “perfect storm”

  The combined forces of advanced technology, high-speed internet, increasing penetration of smartphones and the increasing popularity and functionality of application program interfaces (APIs) has created a “perfect storm” for innovation beyond the app. The increasing affordability of each of these components has further strengthened the storm.

  In an excellent report, “Open Banking: How to Flourish in an Uncertain Future”, Deloitte states: “Technologies such as ‘Infrastructure-as-a-Service’ (IaaS), ‘Platform-as-a-Service’ (PaaS) and ‘Software-as-a-Service’ (SaaS) have allowed new tech-enabled entrants to enter the retail banking sector with lower IT overheads. They have also allowed them to respond more flexibly to changing market needs.”

  There is a growing consensus among industry observers that, while the initial transformation of the banking industry may be an expansion of traditional and non-traditional providers offering new alternatives to existing banking services, the ultimate transformation may be far greater. In the future, the banking ecosystem will expand far beyond just financial services, or financial services may become relegated to being just a small component of a broader non-banking ecosystem.

  The banking model of the future will be some form of marketplace banking. “In marketplace banking, the traditional banking business model is transformed into a data-intensive, platform-based marketplace, where several financial services providers continually compete to offer customers tailored, good-value products,” states Deloitte in the earlier quoted report. “As a result, traditional bank services are augmented by a variety of offerings through an ecosystem of providers.”

  Figure 4: The future of marketplace banking (Source: The Financial Brand).

  A marketplace banking ecosystem would give consumers access to highly-personalised services that leverage customer data made available through open banking and APIs. As opposed to today’s closed access budgeting tools, the new ecosystem would allow consumers to optimise all of their banking relationships—lowering costs and increasing returns.

  Beyond traditional banking services, the new ecosystem would allow banks to become the “hub” for other, non-financial ancillary services provided by other banks or organisations in other industries. In this scenario, bank APIs would centralise an array of life-stage services, reducing friction and improving the customer experience.

  Instead of disjointed components of a life-stage process—like a home or car purchase, starting a small business, or having a child—all involved players (banks, insurance, retail, governmental units, agents, etc) could be brought together in a holistic marketplace.

  A good defense is a strong offense

  The best way to prepare for the inevitable increase in competition that the continued expansion of banking services offered by Amazon, Google, PayPal, Facebook and an increasing number of start-up banks will bring is to be proactive in the development of personalised digital solutions. This will most likely involve new partnerships inside and outside of traditional banking organisations, and a redefinition of what a banking ecosystem includes.

  If banks don’t reorient their approach and radically accelerate their rate of progress, loyalty will suffer, and they will watch small FinTech firms and large technology institutions poach more business. Meanwhile, their economics will erode as too many routine transactions continue to flow through expensive branch and call-centre networks.

  As digital technologies and advanced analytics have provided exciting opportunities for financial institutions, only the largest organisations are truly positioning themselves for the digital future. While t
here are notable exceptions, the question is whether the majority of institutions are too small to succeed in a highly competitive digital banking ecosystem—where winners will be determined based on the ability to use data and insights to deliver exceptional digital experiences.

  The most significant challenge for most smaller financial organisations in becoming a “digital bank” is to have the expertise and personnel to deploy digital and advanced data solutions. Not surprisingly, another challenge facing smaller organisations is the structure of data available to build digital solutions.

  These challenges are not insurmountable, but they are significant. In most cases, smaller financial services organisations will not have the resources internally to address these challenges—especially considering alternative priorities in today’s marketplace. Smaller banks and credit unions will most likely need to evaluate a build/buy/partner decision.

  With available talent in short supply, this leaves most smaller (and many larger) organisations with a decision whether to buy or partner with a specialised solution provider to deploy digital banking solutions. But more important for smaller institutions will be the need for top-level commitment to deploy resources to meet the increasingly demanding needs of the marketplace.

  In the end, there is a great advantage in the customer insights that traditional financial institutions of all sizes possess. The key is to apply these insights in ways that directly and positively impact the digital experience, similar to how large tech firms currently improve shopping, social, search and payments.