Digital disruption and disintermediation – how real is the threat?

By Andrew Lawson, UKI Managing Director, Salesforce

Digital disruption has dealt the banking industry a serious blow, but how serious is the threat these new entrants pose? Andrew Lawson, UK MD of Salesforce, argues that if banks play their cards right, they can still come up trumps. 

Traditional banks are concerned that the rise of new digital companies could disintermediate the banks’ value in the eyes of their customers. These worries are justified.  

New entrants are springing up all over the place. Nutmeg, Transfer Wise and Venmo – these are just a few of the companies taking on core bank functions like  lending, investing, payments and money transfer, and even offering free online financial advice. Customers are responding well; a recent report from Forrester found that one third of affluent US online consumers believe cheap online financial advice is as good as in-person advice, a 22 percent increase from three years ago.  

And that’s not all. Heavyweights like Google, Apple and Alibaba are also getting in on the action. These digital giants – with their users in the hundreds of millions – are offering their own payment services such as Google Wallet, Apple Pay and AliPay. People already have a strong affinity with these digital brands and are used to dealing with them every day. They’re the first place we go when we need information, to send an email, to upload photos or to shop online. Ironically, we even go through their app stores to download the apps offered by our traditional banks. 

New financial regulation is set to further intensify the pressure on traditional banks. Under the Payment Services Directive II (July 2017), new parties can stand between the bank and the customer and take on a lot of the important front-end, ‘customer experience’ services for them. As Tim Yudin, director of collaboration and change at the UK Payments Council recently put it – there’s a danger that banks are relegated to the role of back-office processors while the customer-facing interaction goes to the digital disruptor. 

Traditional banks hold a trump card 

Banks have an unrivalled ability to provide a holistic financial services experience, offering everything from current accounts, to mortgages, to credit, to insurance and financial advice. While digital disruptors can only own a fragment of the relationship, banks have an opportunity to own it in its totality. These digital companies new to the industry simply can’t compete with that. 

That said, many banks are not taking advantage of this opportunity. Currently, 77% of customers believe their banks are failing to meet their expectations. Much of that is down to banks falling behind the rapid pace of innovation. There are two reasons for that…

For one, it comes down to levels of investment in what I would consider true, disruptive innovation. To give you an idea, IDC recently estimated that companies on average spend 70% – 80% of IT budgets on keeping the lights on or product updates. In financial services, experts say that from the £1bn or so that a tier one bank claims to spend on technology, around 97% of that goes on maintenance – on keeping a mobile app running, for example, or creating a new loyalty scheme. So there’s not much left over for research and development (R&D). Now consider that Google, one of the top ten R&D spenders worldwide, invests 13.2% of its entire revenue in product innovation. 

Then there’s the issue of speed. A recent study by CSC and Finextra, for example, found that 45% of the 74 institutions surveyed said it takes them more than 6 months to build a new mobile app; 22% said it would take more than 12 months. How can a bank possibly offer a competitive service in the digital age when it takes this long? 

There is progress, however. Some forward-thinking, mainstream banks are turning to tech entrepreneurs and even disruptors to help them better engage with tech-savvy customers. 

To combat the growing trend of individuals either using banks for single purposes or simply banking without them, banks can look to what we call precision banking: where a real-time, panoramic snapshot of the customer, which captures snippets of information from their profile, credit rating, location and social media, enables banks to take an informed and proactive approach to respond to customers’ desires for personal and contextual service. Precision banking will play a crucial role in helping traditional banks innovate, do more with customers across a wide range of services, and give them an important competitive advantage. 

The innovation game 

Currently, only 49% of high-net-worth individuals believe the technologies used by banks really suit their needs. Customers want innovation, more real-time services, and to feel the benefits in the form of an effortless experience. This competitive pressure demands in-depth, up-to-the-minute knowledge of the customer and constant engagement via timely information. There’s a lot of work to be done here if today’s banks are to compete with new digital disruptors, especially as 71% of individuals still consider their banking relationship to be transactional instead of relationship-driven. Cue precision banking, which helps to shift the focus from ‘transactions’ to delivering the personal and contextual experience customers crave. 

The Frankenstein of slow systems and processes 

Today’s banks are stifled by legacy systems, organisational silos, fractured product lines, and a lack of automation. And it’s really taking its toll. Fractured product lines have led to lead and referral systems in banks with conversion of only 6-9%. What’s more, the distinct lack of automation in banking does nothing to carry a customer through a personal journey – a large deposit made by a customer, for example, would not trigger an offer for a mutual fund. In this day and age, most customers would be amazed things aren’t more joined up. 

With precision banking, they soon can be. Banks will be able to show customers that they can benefit from having multiple services from the same provider. They can develop a deeper understanding of the customer, take on a more proactive role, and anticipate their needs before they arise, reaching out to them wherever they are, however they want to be reached to provide actionable advice. From the banks perspective, the benefits are huge too. Moving a customer from one to four financial products increases the revenue that customer generates by 730%. 

They say there’s no such thing as loyalty in banking, but one thing today’s customers are completely devoted to is the effortless experience. New digital players will continue to disrupt the industry and drive change and that’s a good thing for everyone. The challenge and the opportunity for banks is to excel in offering a holistic family of services that proactively meets their customers every need.

Photo Attribution:© depositphotos/maglara