15 December 2017
Digital Lending Blog
Richard Carter

Digital Lending Blog

Richard Carter - Equiniti Credit Services

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Disruption in Retail Banking

Growth in internet and mobile technologies has transformed many industries and economies. The market forces and competitive landscape has completely changed in many sectors. iTunes has fundamentally changed music industry, Amazon has driven most big brick and mortar book sellers out of business, Expedia is one of the worlds' biggest travel company….. the list goes on. Internet and mobile technologies are big disrupters for most industries. What started (and tapered a bit!) with the dot com boom of 2000 has become a lethal threat to most business models today. Powered by mass adoption in mobiles phones, proliferation of smart phones and cheaper band-width, internet and mobile technology have changed many industries. The banking industry in has been dominated by a handful of big global or regional banks for 100s of years. While the credit crisis has shaken this industry, the core market forces for the industry have not changed. Will Innovation in Internet and Mobile technologies disrupt retail banking? Will there be 5 new names in global top 10 retail banks in 2020?

The challenges of the digital banking revolution

01 July 2015  |  5484 views  |  0

The introduction of call centres and then the fashion for off-shoring call centres in the 1990s can be considered to be occasions when many banks failed to replicate the customer experience they provided in branch. Considerable negative PR followed, and the popular fix was for banks to bring customer contact centres back to the UK and to roll out marketing campaigns that drove home the message that banks had listened to their customers’ complaints and valued their business.

Whether the banks emerged from this situation in better financial health or not is perhaps debatable, but similar challenges are now emerging with the rapid adoption of digital by their customers.

The majority of UK bank customers surveyed by Accenture found their experience “easy” (70%) and “effective” (63%), fewer than half found them “enjoyable” (47%). Whilst the key goal for banks must be to provide easy-to-use transactional services, they must also strive to create the warmth and engagement of a face-to-face exchange though a remote channel, moving digital beyond a simple driver of transactional behaviour.

Threats from non-bank disruptors

Payments is an area where non-bank competition is presenting a challenge for banks. PayPal remains one of the most popular ways for consumers to pay for goods online and digital wallets are gaining traction.

One of the key attractions of PayPal for many consumers is the ease of payment, via a username and password as opposed to having to enter all their bank card details. Digital wallets have the potential to enable consumers to use their bank cards in the same way as they currently use PayPal. The question for the banks is not so much whether to offer a digital wallet, more about how they should deliver this. They can develop their own bespoke wallets or work with one or more partners

In foreign exchange, Transferwise has succeeded in undercutting banks with a destroyer pricing strategy. Heavy promotion of its services has dramatically increased awareness and adoption. Earlier this year after a $58m funding raise, it was valued at $1bn.

What’s the vision for digital banking?

This needs to be considered primarily from the perspective of the customer, not the bank. Importantly, this is not just about digital products and services, it relates to the customer experience. A digital bank needs to be able to offer an online interface and interaction that can replicate and potentially even enhance the interaction of a conversation with a person.

Research, including our own, has shown that younger age groups initially prefer to speak to someone when dealing with their finances, particularly in relation to borrowing. Many technology providers are paying lip service to digital lending by pushing out data, but that’s just scratching the surface. The goal needs to be to push the entire interaction out to the customer and put them in control.

In our view, digital banks need to strive to provide a seamless transition from automated servicing to one to one interaction with a customer services representative, so smoothly that the customer never knows whether they are dealing with a person or not. Once they can offer this, there is a major marketing job to be done to raise awareness and drive the uptake of their services.

The innovators in this market have their sights set on several advantages over the banks, including:

  • Convenience
  • Simplicity and transparency
  • Flexibility and personalisation

They will form the basis of powerful campaign messages, but disturbing the customer inertia that is so widespread in banking will not be an easy task. As Betamax will tell you, having a superior offering doesn’t always mean you come out on top.

Banks’ uncertain response

Existing banks are held back by their legacy systems and also because they have existing customers to consider in any migration / transformation into a digital operation. But the challenger banks also don’t have a clear-cut route to success, with various approaches being trialled. For example, Metro Bank has adopted a policy of opening branches, whereas Atom Bank is not looking to open any branches. That said, a digitally-focused model is where the majority of newer challengers are currently concentrating their efforts.

Banks will understandably seek to gain the support of government and the regulator to ensure a level playing field. This is undoubtedly to protect the customer, but also their own position. New entrants to markets where banks are the major players need to work around the edges to find the space for innovation without attracting too much attention from those that set the rules.

This article is Part 2 of a series of 3 in Nostrum’s Digital Banking Series, published in June 2015.

 

Richard Carter, Chief Executive, Nostrum Group TagsRetail banking

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job title Managing Director
location Harrogate
member since 2015
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Managing Director of Equiniti Credit Services, a provider of innovative and disruptive automated loan management software and servicing to banks, retail brands and finance providers in the UK.

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