McKinsey has produced a paper about the next generation of banking in the United States, describing the challenges faced in customer service, innovation, and maintaining profitability in a changing world. It also predicts what banking will look like in the future, considers countries already adopting new ways of operating, and warns that American banking risks being left behind unless it alters its course. 

It’s an interesting read.

There’s a brief summary and a link to the report below in addition to our own view on how all banks, not just those in the US, can improve their operations.

The Future

McKinsey believes that the next horizon for US banks is the development of ecosystems. In short, an ecosystem is an integrated and personalised proposition offering much more than a range of banking products, bringing together a whole range of different services built around the customer.

Consumer ecosystems currently emerging around the world tend to cluster around needs such as travel, healthcare or housing. Business-to-business ecosystems generally revolve around a certain function - for example, marketing, sales, operations, procurement or finance. Ecosystems typically provide three types of value:

• They act as a gateway, reducing friction as a customer accesses related services.
• They are competitive, owing to the strength of the network.
• They integrate data across a series of services.

US banks are used to offering individual products, based on individual transactions rather than a broad set of services. Asian banks which have been able to build ecosystems have shown improved economic performance. This new approach has led to increased sales and conversion rates, better customer retention and improved margins.

Observed in isolation, it seems like a no-brainer. I wish my bank would offer exclusive deals, source offers based on my purchase history, and do more than send me a loan or credit card deal through the post. The future could see businesses offered a seamless set of services for banking, accounting, administration, HR and IT, all by one provider.

So why is it that the US is so slow to innovate?

The brake on US development

There are a number of reasons why the development of financial ecosystems in the US has been much slower than in other countries:

Consumer behaviour

Other countries reached critical mass in consumer digital adoption later than the States. This meant they were able to go directly to mobile-first models, which are far more conducive to the construction of ecosystems. In addition, US consumers are accustomed to receiving services from a wide range of financial services providers. However, elsewhere in the world a more concentrated model exists and consumers are more familiar with consolidated services.

Regulation

The US regulatory environment has been less conducive to the development of ecosystems. Innovation may have been slowed by the high levels of scrutiny in the US, and specifically the restrictions on non-banking activities, which mean that banks in the States generally tend to contact their customers only when they’re trying to sell them something.

Technology

Technology is evolving at a pace that is blowing the minds of CIOs in the banking industry. Many of these advancements, such as the building of APIs, transition to agile software development and enhancement of data capabilities, can serve as a foundation for a successful transition to an ecosystem model. However, the banks struggle to test and implement effectively.

Consumer behaviour and regulation can be influenced a little. Technology is something the banks have 100% control over, and the future winners will be those able to innovate and launch new technology confidently and efficiently.

We work with financial institutions across the world and have seen the problems they face at first hand. Trying to develop new technology which can replace or interact with legacy systems is a complex job. It can only be achieved through testing automation if you want to control your costs and maintain confidence levels in the solution. Finextra’s research paper on this, produced in conjunction with our teams, can be found here.

Is a change coming?

McKinsey claims that the US may have reached a tipping point. Several trends are converging that could make robust banking ecosystems the dominant model in financial services:

Banks need income

Retail banks are almost universally desperate for increased fee income, as they strive to offset a difficult interest rate environment and build businesses offering higher returns and lower risk. To do so, they will need to provide added services which customers are willing to pay for.

Sales process

Banks are trying to move away from incentivised selling and focus on rewarding sales teams based on quality of service. However, this is a long road and in the UK, for example, some banks experienced a decline in sales productivity after cutting incentives for branch sales. Banks will need a new and more effective way to engage customers and demonstrate product benefits, and to eliminate any friction in the customer experience that could limit take up. McKinsey believes that ecosystems can deliver this.

Changing expectations

Consumers and small business clients increasingly expect an integrated banking service, one that matches the experience they enjoy from other brands.

Consumer behaviour can be changed if banks start to develop propositions which are genuinely customer-centric rather than just pushing products at them. From my point of view, the inability to launch new technology has been the biggest issue holding back innovation. If new propositions can be developed quickly, the market leaders will be those enjoying the healthier margins arising from more engaged and satisfied consumers.

The full report from McKinsey can be found here.