The financial industry has started a major shift towards a technology driven future. While change is happening slower as in other industries, it is unstoppable and is already changing the way customers interact with banks and other financial institutions.
A recent report by Oliver Wyman presented at the World Economic Forum in Davos, identifies the increasing modular way in which the financial industry is structured.
On the customer side, the demand is described as modular because “product providers no longer own the direct customer relationship, with clients easily picking and choosing from multiple providers, perhaps with the help of a mobile application, aggregator or online platform.”
On the suppliers side, the modularity exists because “the supply chain is not delivered in-house, …parts of production are performed by different firms.”
Banks who do not react to these industry shifts could find themselves prisoners of their legacy systems. These do not provide the flexibility to meet the increasingly complex demand of customers. And while suitable supplier modules may exist, the legacy infrastructure must be able to ‘plug’ these in.
This does not mean however that banks have already lost, and will have to cede way to new fintech players who try to pose a threat to their business. In fact, banks are well positioned for a technology-driven future.
There are at least five reasons why banks have an opportunity to do well:
- Relationships: banks have a wealth of existing relationships with customers. The shift to modular demand means that consumers will have less friction to change to competing services, but banks have the advantage of a long history of learning the value of personal relationships. The challenge will be to pass these learnings which were mostly gained in the offline world (branches) to the digital environment.
- Behavioural Data: banks sit on a tremendous amount of customer data. Data analytics programs have only scratched the surface of what is possible in terms of leveraging this data for building customer relationships. Bank can predict when a customer might need a car loan based on his repair bills, and come with a timely offer. This would be a huge improvement from today’s non-targeted mass mailings and web banners.
- Context Data: the integration of digital banking channels allows for even more data to be added to the mix. That customer who is looking for a new car might be visiting car dealers. And a bank can know that by making smart use of location-based data provided by geofences and use of mobile banking.
- Channels: most banks still maintain large networks of physical branches. These are likely to be reduced. But a well-balanced and efficient branch network is a huge competitive advantage to digital-only players. Banks who get their omni-channel approach right, can build relationships with customers and make smart use of the online and offline interplay. A customer may be interested in receiving that timely car loan notification, but might prefer to actually sign at his branch with a manager he already knows and trusts.
- Regulation: banks have a culture of safety-first and are very much used to dealing with regulators’ demands. The recent financial crash has brought a new wave of regulation which banks are absorbing right now. In the short term this may mean an impediment to immediate change and reaction to fintech threats. But over time, the banks’ will have a competitive advantage as new players will start to deal with regulator demands of their own.
It won’t be long before major technological developments in the financial industry will be in full effect. Development of new products, services and platforms is moving fast and new businesses are invented at lightning speed. Banks cannot sit still, but if they leverage their strong starting base they are well positioned to take advantage of the opportunities provided by a technology-driven future of financial services.