Banks are lumbered with legacies that make it difficult to react to market changes fast enough to compete – and a new set of competitors like to taunt them about it.
Challenger banks are using the inflexible IT and business culture to sneer at the established banks and woo customers.
This is not lost on banks.
At a gathering of financial services businesses at the recent SAP Financial Services Forum in London, delegates watched presentations about the future of banking, with finance technology (fintech) taking centre stage. German digital bank Fidor Bank, UK digital challenger Starling and alternative current account provider Ffrees told the audience what they face.
Fintech companies are a hybrid of finance firms and technology firms and they are telling people that banks are losing relevance because they are not offering customers what they want.
Representatives from three challenger financial services firms warned them about an uncomfortable future unless they change and IT requires upheaval to support a cultural revolution in banking.
Decades ago banks arguably had the best IT available, but today technology is holding them back. For years banks had little reason to change their legacy mainframe systems because they were all in the same boat. But today with more and more fintech companies gaining regulatory approval, banks are under competitive pressure, the like of which they have never seen before.
Banks need cultural change
Matthias Kroener, CEO at Fidor Bank, warned bankers they face a cultural change because consumers want different things from banks with IT enabling these services.
Fidor Bank, which currently operates in Germany and Russia, is soon expected to have a UK banking licence and is planning to launch in the US in 2016. The bank uses social media to overcome the cost and complexity of traditional banking, while increasing customer trust through an online community.
The bank has made a profit in its last two years, the fourth and fifth of its existence. It has an open technology platform it developed itself and can be plugged into through APIs. For example, as a result of open APIs, its current account customers can access 25 different services and can, for example, deal in foreign currencies and precious metals with the same current account.
Kroener said that, far from being digital leaders, banks are trailing. “Retailers are doing better than banks because they are really feeling the heat from customers,” he said. Shoppers have been demanding digital services from retailers and vote with their feet if the services are not provided. Amazon drove this change.
But the same is now beginning in banking. Previously there was little choice between what banks offered and if a consumer decided to change banks it was a painful experience. But today new banks are winning regulatory approval in numbers never seen and it has been made easy for consumers to switch bank accounts.
Kroener welcomed the bankers in the audience “to the future.”
“If a bank is not behaving like a fintech company today I promise that, within five years, it will face trouble,” said Kroener. He said there has to be “cross breeding” between traditional banks and fintech companies to ensure the right mix of banking experience and customer-focused, IT-enabled services.
Startup development programmes
This is happening already. Large banks are investing in developing relationships with fintech companies through such platforms as accelerator and startup programmes, where banks invest in developers and help them create products and services that fit bank requirements.
For example, speaking at the SAP forum was Royal Bank of Scotland’s director of design, Kevin Hanley. He admitted the big banks no longer “own the end-to-end customer value chain.” Fintech companies and new banks are picking away at individual services. He mentioned mobile payments as an example with non-banks accounting for 45% of the £4bn market today compared to 4% three years ago.
In a bid to keep pace with change, Hanley said RBS has teams of people looking at thousands of technology companies all over the world to see what technologies RBS can use. The banking expertise of RBS staff can help make fintech ideas work. He said it is easy to find thousands of these firms but filtering them and deciding how to progress them into the pipeline is more challenging. RBS is also attempting to reduce reliance on its legacy systems, which are often cited as reasons that banks can’t change quickly enough.
But it goes way beyond technology. Kroener emphasised that a bank’s culture must change as well as technology, which is just the enabler of the change. He said they must move away from focusing on making as much money as possible and towards providing customers with the financial products and services they want. “When you are a new bank the first thing people always ask is: ‘Are you profitable?’ They never ask whether your customers are satisfied,” he said.
Banks do not understand what people want, said Kroener.
Quoting US study, The Millennial Disruption Index, he said 53% don’t think their bank offers anything different from other banks.
“Only two industries are worse. Petrol stations and insurance companies,” he added.
Worryingly for banks’ communication strategy the research also revealed that 71% would rather go to the dentist than listen to what banks are saying.
Read more about financial services challengers
Kroener said there are 12,000 fintech companies chasing banks’ business with a very customer-centric idea. “The difference between a fintech company and a tech-enabled bank is the customer centricity, user experience and process.”
“Look at process. It takes 40 clicks to apply online for a loan at a traditional bank. Would Google be so successful if it took this long to do a search?”
“Banks call it mobile banking if they send a PDF to your mobile, ask you to print it out and bring it to the branch. This is not mobile banking,” added Kroener.
Getting closer to customers
He said if banks want to succeed in the future they will need to communicate with customers to understand what products and services they want and how they want to receive them. “Social media is about listening, not just shouting out your boring message.”
He said there is a misconception that, by having branches, banks are closer to their customers. “You queue up for ages and then get to talk to a salesperson. You can’t get peer-to-peer lending and crowdfunding in a branch.”
During the same session ex-Allied Irish Bank banker Anne Boden, who set up challenger bank Starling, said there is a whole generation of people today that live their lives differently. “They are used to lots and lots of technology and lots of apps to help them manage their lives,” said Boden.
Starling bank is a digital current account only bank with a debit card and access to all major payment systems. It also offers a service to help people better manage their finances.
“It is all about figuring out how you manage day to day.
“We do one thing very well and we help our customers select other suppliers for other financial services products
Alex Letts, CEO at current account Ffrees, said the company wants to return banking to being something that people trust. Its current account focuses on giving all its customers the same service at the same cost and help people get out of debt, by offering services to support saving. “It is not hard to set up a current account unless you have 500 year history and a 50 year technology legacy.” He said the big banks have not kept pace with digital, "because up to now they haven’t had pressure from customers to do so”.
