Banking and financial services companies have seen the
writing on the wall for some time now.
Customers are changing. They’re moving from tellers and ATM
machines to the digital realm where they seek additional, personalised,
cashless services—services that have seen lower rates of adoption by many of
the traditional financial institutions.
Waiting in the wings are fintechs and big technology
(BigTech) companies. These include businesses such as Acorn, Chime, Robinhood,
and Plaid as well as the more widely known names such as Apple, Google, Amazon,
and Facebook.
All of these companies have stepped into this void, steadily
stealing away customers. Perhaps the best example of this is Apple Pay, which
according to eMarketer now has more than 43 million users.
The good news for traditional players is while they were
late to the party, many did finally arrive and began to take action. But did
they focus on the right areas of their business? The answer to that question is
an emphatic no.
For these entities, the primary focus of their revolutionary
efforts was cosmetic, with the bulk focused on making improvements to front-end
customer experience. While the changes to the frontend may have been dazzling,
in the backend, these businesses were for the most part still running on the
same old legacy applications.
This short-term strategy was put to the test when the
pandemic hit and a record number of consumers turned to online banking. This
includes Baby Boomers, many of whom dipped their toes in the digital waters for
the very first time.
According to Statista, 46% of US Baby Boomers are using new
digital channels for their banking since the outbreak of COVID-19. When you
consider that in 2018 this group had the lowest use of these digital channels,
this figure is incredible.
The good news for banks was that they had their new
frontends ready for customers which allowed them to achieve some levels of
success. However, this faded fast when banks were being increasingly pressed to
roll out new digital services to adapt to their growing digital customers.
Hindered by a short-term strategy, which largely ignored the
need to accelerate the organisation’s complete digital process, some banks were
not able to evolve to suit the needs of their customers.
For many consumers, this made fintech the answer, and the
sector was one of the biggest successes during the pandemic. The shift is
evident in many ways. For example, according to McKinsey, since the outbreak of
COVID-19, there has been a 4-5% reduction in global cash payments. That is four
to five times the average decrease in cash usage in recent years.
So where does this leave banks? There are those who believe
the answer is to keep building their own digital capabilities. While building
is a key strategy, it cannot be done with the intent of competing with these
new entrants.
Efforts are better focused on building a solid foundation
that enables rapid innovation and collaboration with the larger financial
ecosystem of fintech and BigTech.
When building out this digital foundation, the goal should
be to simplify the applications that are in place now. Abandon what’s likely a
tightly coupled monothetic architecture in favor of a highly scalable, agile,
simplified, and secure architecture. This provides a more future-proof system
and allows banks to keep up with customer demands and the always evolving
industry landscape.
Next, shift the focus outward. Specifically, identify
partners, services, and fintechs that could be good innovation partners—and
identify use cases to experiment on together. Once done, create prototypes that
the two sides roll out together.
The third step shifts towards the BigTech players. Banks
should begin productising services. These can include payment-as-a-service,
lending-as-a-service, and others which they can then provide to the BigTechs
and charge customers using their model of choice, like a monthly subscription
or pay-per-use.
We have seen some signs of this already happening with
Google, which late last year announced partnerships with 11 banks and credit
unions including Citi and Stanford FCU. Working together, Google Plex, as it’s
called, offers a mobile first bank account that’s integrated into Google Pay.
In the months ahead, we will likely see more and more partnerships
being formed that follow Google’s lead.
For banks and financial services, the pandemic has shined a
giant spotlight on where the industry is going and the steps businesses must
take.
While the vast majority quickly discovered just how much
work needs to be done, what Google has shown is that this opportunity is real
for those ready to take it.
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