Banking on your data – traditional banks and digital natives can co-create value by joining forces

As the UK’s vaccination rollout continues apace, thoughts turn with cautious optimism to post-pandemic recovery. Financial institutions will play a crucial role in the country’s revival, as the facilitators of funding to businesses and consumers. One of the most effective things they can do to kick-start value creation is enter into mutually beneficial inter and intra industry collaborations to address pain points and position themselves strongly for the future.

Traditional banks are custodians of vast amounts of data, plus customer relationships and trust established over many years. Through strategic alliances with digitally native firms, they gain access to the necessary technological capabilities to fully utilise this data for insight-led product development that is closely aligned with what their customers want.

In this way, banks can grow market share, maximise efficiencies, scalability and speed to market of new services, and gain entry into new geographies and customer segments. And the benefits go both ways, as emerging digital players cannot currently match the customer data owned by banks.

The next logical step in the evolution of banking

The economic ramifications of Covid-19 have dented banks’ performance, and a lot hinges on their ability to build greater resilience into their operations. McKinsey’s “milder” predicted scenarios point to a loss of $100 billion in capital across the UK, Europe and U.S. if GDP returns to pre-Covid levels in 2021, and $400 billion can be wiped out if recovery takes until 2023.

The UK fintech sector, meanwhile, attracted $4.1bn in financing last year. While this cemented the country as Europe’s leading investment destination, the figure saw a 9 per cent drop compared with the previous year. Increasingly blurred lines between traditional financial services, fintechs, start-ups and big tech mean that collaboration isn’t just a prudent business decision but an essential one, as all compete for the same customers during an economic downturn.  

We’re seeing a growing trend towards digital natives and specialised financial institutions forging synergistic partnerships that are less about further disruption and more about new ways of innovating with existing technology and data to cater to customers’ requirements. The same goes for larger banks and multinational tech firms – such as Amazon and Citi partnering up to give Citi customers the option to ‘buy now pay later’ at the actual point of transaction. This feeds into the current landscape of consumers with recession-hit budgets still wishing to spend on what they want or need.

Effective data usage is the only way to reach the ‘new’ customer

Today’s consumer seeks instant communication, advice and personalisation, and expects to receive it via their mobile phone. In 2020, 76 per cent of people used online banking frequently, with smartphones the channel of choice. These customers also favour convenience, and companies can attract (and keep) them by providing frictionless, customer-centric services offering everything they need in one place. Insurer Chubb’s partnership with Revolut achieves this by introducing a variety of coverage options – including for tickets bought through Revolut if a customer is diagnosed with Covid-19 and cannot attend the event.

Large banks are much less agile than challengers, which are architected on platforms that are nimble enough for real time interaction of this kind. The only way for the traditional organisations to truly engage with this ‘new’ customer is through smarter and automated data analytics.

Knowledge is power; banks hold huge amounts of data but don’t necessarily have full visibility of it or the ability to make full use of it due to legacy constraints and siloes. Collaboration is the avenue to more advanced analytics, incrementally, rather than as part of a monolithic digital transformation project. A financial institution’s digital environment directly influences how fast it can monetise its data. The Cloud is an enabler of this, making it possible to employ AI and machine learning capabilities to drive data-driven analytics. Through cooperation, banks can also harness fintechs’ applications to create white-label services and products through a SaaS model.

Collaborating for innovation – what each side brings to the table

People tend to have more trust in banks than for technology firms. Digital natives cannot replace core banking institutions but can offer valuable enhancements and add-ons to underpin innovation and operational resilience.

Where challengers can benefit from traditional institution is mainly in the areas of risk and regulatory compliance – banks have the necessary checks and balances in place that are required for any digital entity looking to grow to a certain size and scale to reach maturity in its operations.

On the other side, traditional financial services firms have certain less profitable customer segments, and there’s opportunity there to move blocks of customers onto a ‘low touch’ or a ‘no touch’ model. So the digital firm gets access to a big customer base while the financial institutions get to turn all customers into profitable ones.

Is the challenger space at the point of saturation?

Between 2018 and 2020, the number of ‘live’ neobanks worldwide grew fourfold to 256 – with 37 of those in the UK – and more in the process of being launched. Many don’t make it, with the pandemic crisis further impacting chances of survival for all but the most well-funded and differentiated. In a competed market, neobanks can gain a more robust foothold by cooperating with established financial or tech organisations for product-related innovation in specialised areas.

Many retail digital-only banks operate with a basic rate card and a checking or savings account, and although they have steadily onboarded customers, the average deposit amounts tend to be low. Therefore, there is consolidation waiting to happen across every product category – not only from a digital banking standpoint but across lending, wealth management and more. The challenger’s proposition still has a way to go in its adoption of technologies such as blockchain, which is around two or three years away.

The next step is for the industry to begin moving away from the consumer and retail side of banking towards the commercial, merchant and institutional side. That’s an area where a big gap still persists and holds the potential for value creation.

The pandemic highlighted weaknesses, particularly when it comes to incumbents still lagging behind the modernisation curve in terms of legacy systems. Redressing this balance must form the crux of banking leaders’ strategies. That’s where collaboration can make a difference quickly. Digital natives are focused on – and good at – understanding customer motivations, an objective shared by incumbents.

Therefore, rather than viewing one another as opponents, they can co-create products and services based on individual needs by combining their complementary strengths. Both can reap the advantages of enhancing customer stickiness and, with it, the bottom line.