How can the established players in financial services deliver meaningful game-changing innovation? What are the challenges in building this from scratch and does the key lie in partnerships with fintechs and start-ups?
In its earnings report at the start of 2019, Netflix named Fortnite as a bigger competitor than Hulu or HBO. Why? Because streaming services compete with whatever else is a rival for customer screen-time, whether that be a fellow media company or not.
Just as consumers only have a certain amount of time they can spend in front of a screen, they only have a finite array of financial needs and limited time (and patience!) in which to manage them. Banks and other financial services companies therefore need to prioritise convenience and seamless experience, however which way this can be achieved.
“Banks need to start taking a leaf out of GAFA’s (Google, Amazon, Facebook, Apple) book - adopting digital, customer-first experiences built on data,” says Martin Haering, chief marketing officer at technology company, Finastra.
“They can also no longer ignore initiatives like Facebook’s Libra project, and the rise of the super-apps in APAC. They need to learn from what is working elsewhere and consider how they can serve customers better, not just in banking, but in other adjacent areas.”
Legacy systems and legacy business models
Søren Rode Andreasen, chief digital officer at Danske Bank, concedes that this is a difficult step for a large established bank to take as it comes with the threat of an immediate shock to the balance sheet.
“It is true that at a major bank, you have an income model and you might risk cannibalising your own income,” he tells Finextra.
This is where the challengers and fintechs of the world are at an advantage. Not only are they not slowed down by the oft-spoken about legacy systems and processes, they are less burdened by “legacy P&L”, as Richard Davies, COO of Revolut, puts it.
Speaking of services such as FX, Davies describes the difficulty incumbent banks have in juggling parts of their business model which may not be particularly profitable, but remain significant to their bottom line.
"Incumbent banks don’t have the time horizon to risk losing £200 million, because senior managers are on a one-to-three-year performance measurement,” he says.
“It is hard to imagine any major banks just cutting off their arm like that. They would far rather just slowly bleed to death.”
While challenger banks may offer compelling digital propositions, there is still be doubt over the sustainability of their business models in the long-term, given their struggle for profitability.
With this in mind, incumbent banks may look beyond the digital challengers in financial services and instead try to emulate the all-profitable, all-engaging market leaders in other industries.
True innovation in financial services will not simply emanate from digitising the same customer experience that has existed for decades, but by monitoring expectations set in other sectors, such as travel, entertainment and commerce.
“The trap is when companies only benchmark their experience against others in what they define as their category, say: retail banks,” says Peter Pawlick, director of consulting at R/GA London.
“We talk about the idea of service transference: if a customer has experienced a level of service anywhere, they expect it everywhere.
“We need to understand how people’s expectations are being set by experiences across other categories, such as hospitality, travel and entertainment.”
Innovation in collaboration
The question established firms are faced with is whether they will be able to innovate quickly enough to keep up with the pace of change. Should they pursue internal transformation or harness the agility of challengers and fintechs?
Needless to say that if incumbents were to ask digital disruptors, they would advise them to choose the latter.
Iqbal Gandham, UK managing director of social trading platform, eToro, says: “My advice is give innovative companies and start-ups access to your network, set the parameters for what you’re looking to do, but give them the freedom to develop the ideas, because they represent the customers you want to try and reach.”
Such collaborations could facilitate access to underserved markets which are hard to cater to, for example. A case in point is business bank OakNorth, which provides debt financing for SMEs, focusing on the lower mid-market, with loans ranging from £1m-£40m.
As well as being a fintech which licenses its platform to banks around the world, OakNorth is itself a bank, powering savings products for other providers such as Monzo and Moneybox.
Amir Nooriala, OakNorth’s chief strategy officer, says “When we talk to the biggest banks in the world, we’re not saying, ‘You need our help because you don’t know what you’re doing.’
“We’re saying, ‘We think you would be interested in what we’re doing - lending to the lower mid-market sector. But it’s a very difficult area to get into.’
“This is because SME lending is local by definition, which isn’t the way banking is now.”
Nooriala argues that loans to local businesses would once have been the remit of a local bank manager who could make decisions based on his or her knowledge of the area and its people.
“This has disappeared and been replaced by a graduate with a checklist,” he says.
OakNorth’s aim is to replicate the old-fashioned local bank manager, by making decisions on SME lending through harnessing AI and big data to deliver lower risk credit scoring.
Pipes and plumbing
Legislation such as Open Banking and PSD2 should prove a tailwind to the partnerships that eToro recommends and OakNorth offers.
Making their metaphorical pipes and plumbing agnostic to different providers and not having to revisit and rebuild technical infrastructure whenever new innovations are integrated will alleviate concerns of operational risk, data management and so on.
Dan Globerson, head of Open Banking at RBS, speaks of the culture change that this will encourage.
“The fact that we've had to build pipes that capacity can be extended upon, that third parties are allowed to use (assuming they are regulated) has created a reusability scenario that allows us to escape the traditional burdens of bureaucracy etc.”
Globerson believes working with fintechs and recognising the threat of challengers will change opinions and perceptions at incumbent banks about the “art of the possible.”
“I think when you when you work with legacy platforms, you believe they need to be near bulletproof. It is easy for us to fall into the mindset that less change or slower change protects the surface,” he tells Finextra.
“While there is some historical truth to that, I think we’re now far more open to the possibilities of how quickly we can get things done, and that there are great ways to pump new ideas into the atmosphere.”
Innovation models in financial services will be discussed at Money20/20 USA in Las Vegas. Check back here on 27-30 October for coverage from the event.
Jamie Crawley, Reporter, Finextra