By Leon Gauhman CSO/CPO of digital product consultancy Elsewhen and Alessandro Hatami, managing partner of Pacemakers.

The world’s biggest banks came out of 2021 in robust shape. A slew of positive trading updates led to a rebound in share prices and the return of bonuses and dividends. Any damage done by Covid was reversed as the industry’s giants rose on the surging tide of increased consumer spending and corporate deal-making.

Yet the feeling prevails that the legacy banks are unprepared for the next development phase, with agile fintechs and cash-rich big tech ready to take a huge bite out of their market share. Amazon’s recent broadside at Visa is just a taster for how assertive the disruptors are becoming.

JP Morgan’s high-profile CEO Jamie Dimon acknowledged that competition from tech-driven players is “going to be very tough” and has committed $12 billion a year to invest in tech, a figure one analyst called "astonishing." This is echoed by developments at Santander and HSBC, where CEO Noel Quinn plans to “digitise HSBC through higher levels of technology investment.”

The problem for legacy banks is the pace of change means that investment alone will not be enough. The FCA just published its 2022 strategic review of retail banking which revealed that a digital bank now holds nearly one in ten of the UK's current accounts. Right now, the incumbent banks are rearranging the chairs on the Titanic, when they should be building an electric-powered plane.

There are two issues for banks. The first is that they are trying to protect their heritage (brands, branches, culture etc.), when this legacy is increasingly irrelevant in an age of embedded finance and BaaS. 

Secondly banks continue to think of themselves as retail brands selling products and services. Their operating model, P&L reporting and governance all pivot around this misconception. Instead, banks are enablers; they allow customers to pay for groceries or borrow to buy a car. Their key asset is their relationship with the customer. That is under threat from GAFA companies with great UX and deep pockets who are all moving into financial services. 

One helpful model for thinking about banking innovation is to divide it into three phases: Adapt, Evolve and Transform. Banks and fintechs have already delivered on the Adapt phase. They are currently locking horns over Evolve, powered by several innovative core banking platforms and solutions. 

Where incumbent banks need to be is the Transform phase. Here, we're talking about a radical customer-centric vision that will future-proof the banking business model – as long as the key players get there before big tech beats them to it.

So what exactly does it involve? 

In the Transform phase, banking reaches a new paradigm driven by hyper-personalisation and seamless AI/machine learning support. In this vision, every customer has a personalised bank built on the dual strengths of invisibility and individual specification. To use a music sector analogy, if Adapt is Tower Records and Evolve is iTunes, then Transform is Spotify.

In this scenario, it's not about developing an eye-catching brand or branch redesign. Instead, it's about delivering an experience that endlessly reshapes itself around the customer based on three core needs: spending, borrowing and saving/investing. Here are three key features of this game-changing model:

1. Real-time personalised banking: Most bank customers agree that trying to get through to banks and access relevant advice is a hassle. In the future, banks prepared to transform around a customer-centric model will give customers their own real-time personal banker dedicated to acting in their interests and responding to their needs. This customer-centric bank will use APIs from open banking, social media, online spending and location services to apply insights from customers' data, past and present. As a result, it will automatically take the best course of action for the customer, becoming a trusted, transparent financial companion. Webank, part of China’s digital behemoth Tencent, is an early example of what this bank could look like. By offering an entirely digital solution to micro businesses (based on very creative uses of their clients’ mobile phones) Webank has been able to serve an underserved segment profitably. 

2. Invisible, intuitive customer experience: While it sounds futuristic, the tech already exists to make this customer-centric model possible. There are tailored tools to build innovative customer services including cloud-based and Open Banking platforms. Examples include TINK, Codat and Vodeno. This state-of-the-art banking technology, when combined with open data, flawless UI, exciting customer journeys, and natural language interfaces will help simplify the banking process for consumers. Instead of a bank branded chatbot, the customer-centric bank will deliver an intuitive and invisible user experience that rapidly determines the best course of action for the customer, making data-powered recommendations that support their ambitions. 

3. Customer outcomes and retention as the core metric: To stay relevant, incumbent banks need to focus on the fact they are lifestyle enablers. This shift means moving away from a business model designed around profit from selling standardised products and services.  Imagine a bank which operates in its customers’ not its own best interests, offering personalised, whole of market advice, not just what the bank sells. In today’s climate it sounds not only counterintuitive but unthinkable.

However, in an increasingly competitive banking sector this customer-focussed approach would be a differentiator and a powerful retention tool. Customer relationships built on trust, transparency and satisfaction can’t be commoditised and so will be pivotal in driving bank profitability.

Final thought 

The customer-centric bank harks back to the origins of banking. The first bankers did not think of themselves as brands selling mortgages or credit cards. Instead, their aim was to try to resolve a customer's problem. In the future banks won't look like banks. Rather, they will be judged by their ability to solve problems and facilitate key financial moments in their customer's daily life. Advances in digital tech mean it's now possible for banks to deliver consumers a seamless, intuitive, responsive financial experience. But if they don't step up, big tech will.