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The opportunity from digitisation in banking

There are a number of areas of the digitalisation of financial services that represent opportunities for established banks and new entrants to the market.

More than £1.7 billion is now transferred each week using mobile phones or tablets at the major UK banks, and, according to Accenture’s research, around 80% of the UK banking population is now using some form of mobile banking service every month. You could realistically expect that number to increase towards 90% in the next couple of years as more teenage digital natives enter the banking industry and digital skills among older customers increases.

Working out where crypto-currencies, wearable tech and biometrics fit into a banking proposition isn’t straightforward, but could be the sort of breakthrough that entices a customer or retains another. These aren’t issues we’re debating here, but you can be sure they are on the radar of every bank. Whilst banks are perhaps unlikely to develop their own products, they may be able to benefit from offering them to their customers via developments such as open APIs.

In the short term, and to meet forecasts of future digital adoption, banks are investing billions in digitising their core operations. Despite this, significant work will continue to be required to get the value out of the digital propositions. Perhaps the biggest challenge and opportunity is to invest in and integrate with those innovations that can add long-term value rather than short term benefits. Easier said than done when the future is far from clear.

So where does this leave the banking industry in the UK?

For the new banks that are entering the fray, the challenge is to win customers. The notion of ‘if we build it they will come’ will not necessarily hold true. For example, current account switching is now easier but still suffers from inertia, meaning that many customers probably are not getting the best deal they might if they shopped around.

If a new bank creates a digital proposition that truly engages with the customer then it will have a base upon which to build advocacy amongst early adopters. Over time, it can hope to achieve the critical mass that will make it a viable business.

For the existing banks, the debate is whether to look to digitize their existing operations, to launch a new digital offshoot brand, or to keep a watching brief and then look to acquire whoever gets it right in digital banking. Each approach carries different risks and potential benefits.

Moving forward banks must find the right blend of efficiency saving, revenue generation potential and the opportunity to be closely and continuously engaged in their customers’ lives offered by attractive, relevant and tailored digital experiences.

Lessons from other industries

Banks may choose to mimic other industries with their approach to a branch network. The supermarkets’ penchant for smaller inner city convenience stores is one potential move, which allows banks to retain favourable brand awareness and reducing overheads.

Although challenger brands in markets like personal loans may never have a physical branch network, they can be the same if not better in other aspects of their customer experience. Contact centres, live chat facilities and social media can all be utilised and optimised. Without needing to balance the costs and PR considerations that come with a scaled back branch network, finance providers can focus on delivering a superior experience and investigating new smartphone approaches – like Whatsapp, the hugely popular instant messaging app that was bought by Facebook last year. All these savings could filter through to lower costs for the consumer, allowing challengers to compete on price.

Of course, digital innovation counts for very little if security is compromised at any time. Digital start-ups are innovating in this area too, bringing a range of attractive and low friction ideas to market to address the challenge of digital security. For example, one app can authenticate users through the process of taking a “selfie”, comparing the image taken with a stored scan of the device owners’ face. We saw a number of new concepts relating to security and authentication when we were at Finovate earlier this year, where this was one of the dominant themes at an event with a track record of being ahead of the curve in terms of industry trends.

The power of data

Big data is a term creeping into the mainstream and is commonplace among those working in financial services. Providing services that match and even exceed the expectations of customers in their lives outside of financial services is the challenge for financial services providers to rise to.

While banks may be the first to combine their data with that of retailers to provide personalised services (Nationwide’s “Simply Rewards” show how banks are increasingly collaborating with retailers to offer customers relevant savings opportunities) and their data will be impressive, the techniques are not exclusive and challengers can quickly gather data, particularly through social media and offer similar services.

The combination of open source technology, cloud and an emerging workforce with significant digital skills is a chance for banks and their challengers to create faster and more efficient processes, responding to their customers’ demands for an ‘Amazon’-style instant service.

Our message to the banks and lenders we talk to is a simple one – focus your efforts on making your processes cheaper, faster and safer, but choose your technology and implementation partners carefully. Building your digital proposition is essential, but it’s vitally important to protect your brand as the competition gathers pace and the new banking landscape takes shape.

Richard Carter, Chief Executive, Nostrum Group

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