Banks are struggling to survive through the digital age. In order to compete with FinTechs, regulatory mandates and consumer requirements, banks must be able to plug-and-play into the digital business ecosystem to recover market share and reassure their value proposition. Financial institutions and banks need a new strategic mindset for their business in 2017 and beyond.
The unprecedented amount of disruption in the banking industry is happening across every market, every distribution channel and every single product line that is currently active in this segment, which is something that is changing the very core of the banking business model. The appearance and fast proliferation of low-cost FinTech competitors poses a potentially fatal risk that will bring traditional banks’ IT systems and ecosystems to their limit, as well as their skill to ability to rapidly respond to the increasingly changing consumer expectations.
The time to debate if the rising FinTech startups could generate any real traction is now gone and conversations should focus on how fast and how far transactional banking will be unbundled and margins decreased. The question traditional financial institutions are asking in what is the best action to be taken, and even there are a number of strategic options and potential responses, the right path is still not clear yet, as some of the largest banks are developing their own technological solutions in-house, others are acquiring FinTech startups.
On the outside, banking providers are partnering with FinTech players and open up their platforms to grant third parties access to their customers, two strategic actions that are gaining ground.
Banks are now facing different challenges in the digital age that has been pointed out by many researches and market experts. Among these challenges, it is possible to highlight some of the most impacting ones:
According to Gartner and IDC, by 2018, banks and financial institutions clients will access and contact their banks mainly through mobile devices;
Banks and financial institutions CIOs main concern to 2017 and beyond is what will be done with their companies’ branches;
According to the 2016 MX Consumer Survey, clients find it more important an easy digital banking experience (67 percent) rather than a friendly teller or staff (33 percent) when choosing where to open an account;
According to the 2016 MX Consumer Survey, banks and financial Institutions clients are now more likely to access their banks in a more impersonal way, and only 19 percent use a personal method (branch or call center), as shown on the chart below:
Currently, the number of strategic challenges facing the banking industry may seem quite overwhelming, and prioritizing what needs to be focused on is an important and vital exercise for CIOs and other IT executives working within this market. According to the 2017 Digital Banking Report, the top three priorities that were mentioned were improving the digital experience, which was mentioned by 71 percent of the respondents, enhancing data analytic capabilities, mentioned by 50 percent of the respondents, and finding ways to reduce costs, mentioned by 41 percent of the respondents, and the rest of the priorities mentioned were at least 15% less likely to be mentioned. Interestingly, despite a great deal of coverage in industry publications, the desire to partner or invest in FinTech relationships is a low priority for all but the largest organizations. The chart below shows how banking IT executives listed their 3 main priorities for 2017:
These results are not too surprising, giving the current market situation, but a closer look on the 3 main priorities that were highlighted in this survey may be important to understand how digital banking trends will rise and how the current digital banking state will evolve.
Improving or enhancing digital experience
Consumers are increasingly making decisions based on how easy it is to interact with their financial institution, and the growing competition around the customer experience is creating new roles and titles within the banking industry. The challenge has been that, while a majority of financial services firms are in the process of expanding their customer experience projects, especially as it relates to both digital and mobile engagement, there is still difficulty in gaining resources to pursue new projects and, in order to apply resources towards improving the customer experience, banks and financial institutions will need to design KPIs and other metrics to properly measure success.
Currently, there is a wide variance in methods and metrics that are being used around satisfaction, retention, loyalty, engagement and, in some cases, around revenue. Improving the customer experience was the most consistent in level of mentions across asset categories, type of organization and location in the survey, and this is surely going to be on the spotlight for a while, once banks and financial institutions must move from a transaction management business model to a relationship management business model.
Enhance data analytics capabilities
Every trend for banking for the upcoming years is virtually putting customer insights, information and data analytics at its foundation, from making the customer journey frictionless, to improving multichannel delivery and exploring the use of open APIs, data is the fuel that will power these initiatives. Banks and financial institutions have plenty of information and data available, still most organizations are having a hard time understanding and defining the data will effectively have an impact and how to harness the full potential of insight collected, and some of the reasons for falling short of potential include:
Competing priorities: Within the financial services sector, as time goes by, due to the amount of priorities, many may change very rapidly and suddenly.
Technology complexity. Financial institutions and banks very rarely use the full potential of their available data due to their multilayered systems and data segregated in silos.
Lack of internal collaboration. The lack of interaction between the different areas of financial institutions can result in a poor allocation of human, financial and technical resources, as well as restrict exchange of ideas.
The issues in neglecting the data financial institutions and banks have creates the risk of falling behind in leveraging consumer insights, once consumer expectations are rising and the great majority of these are being set by non-financial competitors.
Reducing operating costs
Many financial institutions and banks are now more concerned and paying more attention to their operating costs due to the recent reduction on interest rates and operating margins, causing a massive time and effort spent to cut costs wherever possible, and in some occasions, these efforts have been done without understanding the impact on the customer experience or without fixing underlying process flaws.
Whenever installing new digital banking technology (in the interest of reducing costs or more operational efficiency), it doesn’t help much unless the routine processes that are being automated are first closely examined and streamlined applying some of the principles of industrialization and efficiency management to processes and operations. If the financial institution or the bank does it without a proper review and improving of underlying processes, any digital banking initiative will fall short of full optimization and, at worst, simply automate already dysfunctional processes.
The future of banking itself in the digital age is a complicated subject to be discussed given the way it has been disrupted in the past few years. Many banking executives expect the landscape to be shaped strongly by both technology and non-traditional competitors, retail banking will be fully automated and more money will flow through FinTech firms than traditional retail institutions. That makes very clear the problem with innovation within financial industry: it can be quite unpredictable in terms of timing, scale and consequences.
When it comes to the digitization process of banking, it is necessary to understand that it is driving a huge transformation and rewriting its business model as consumer expectations change. For the first time ever, the importance of branches and human interaction became open to debate if necessary and many traditional banking providers are now reformulating their market and operational strategies to survive and remain at the center of consumers’ financial lives by shifting from transaction centers to a valuable financial advisory services.
Marco Antonio Cavallo is a technology/digital transformation evangelist and expert when it comes to the strategic role of CIOs, technology strategy and trends, FinTech, InsureTech and technology applied to business in many different countries and cultures, providing cross-border strategic orientation for different industries and executives. Given his corporate experience of almost 20 years, he brings a variety of insights, trends and market perceptions about different technologies and their usages in the Digital Economy.
Marco is the Founder and Chief of Research of the CGN Research & Advisory Group and has a successful professional history in many well-known international companies, such as Gartner, SAP Ariba, Comarch Systems, Volkswagen Financial Services (LeasePlan) and Lexmark International. He is also the founder of the CIO Global Network Group that gathers 7.500+ CIOs and other IT senior executives around the world, advisory board member for the Innovation and Technology Committee at the Florida International Bankers Association (FIBA), advisory board member for the Innovation and Technology Committee at Federación Latinoamericana de Bancos (FELABAN), author of many articles about digital transformation, technology trends and the role of the strategic CIO, among other IT-related topics and an active member of the IDG Influencer Network. Marco is an international keynote speaker for many different themes and conferences, such as Cl@b/Felaban 2017 (USA), Gartner CIO Summit (México), Mondato LATAM Summit (Argentina), APICON 2017 (Brazil) and Data Science Forum 2017 (Brazil).
Marco graduated in business administration by ESPM-SP University, MBA in Corporate Finance and Economics by FGV-SP University and has been through different specializations in many international renowned institutions such as Northwestern University/Kellogg School of Management (U.S.), McGill University (Canada), Florida International University (U.S.) and Erasmus University (the Netherlands).
The opinions expressed in this blog are those of Marco Antonio Cavallo and do not necessarily represent those of IDG Communications, Inc., its parent, subsidiary or affiliated companies.