The end of banking as we knew it
Take a moment to travel back in time. It is four o’clock on a Friday afternoon in early June. Perfect weather is forecast for the weekend. John Smith is in line at the local bank branch, contemplating a family holiday get-away, waiting to deposit his paycheck, review his balance and withdraw just enough cash for the weekend. He can pay for the hotel with a check. John recently received a credit card but is reluctant to use it, fearing the temptation to spend more than he budgeted for the trip….
To most readers under 30, our description above reads like a quirky novel set in the era of Thatcher, Gorbachev, Mitterrand and Reagan. It wasn’t that long ago that the bank was a highly visible and important community institution, the physical location and size of which were indicators of not only the bank’s stature but also the community’s financial value and growth potential. Bank names often included the word trust, indicating not only the trust services the bank provided but also the notion that one could rely on the bank as a safe and trustworthy place to keep one’s money. Transacting business typically necessitated a visit to the bank and interacting with a teller.
The first drive-through bank window—introduced in the 1930s in the United States, 1959 in the United Kingdom and 1962 in Switzerland—was an innovation offering convenience (and, in the case of the US, some measure of protection against bank robberies that were then on the rise). By 1969, automated teller machines (ATMs) allowed customers to forego tellers and offered the convenience of 24/7 withdrawals. But by the 1980s, the bank as a physical brick-and-mortar institution and the primary (and in many communities, the only) source of financial services began to change.
These modest “advances” and the glacial pace at which they evolved are nothing compared to what the industry is currently undergoing. The physical buildings that people visited, “the incumbents”, even the ATMs, are rapidly being replaced by online banks and mobile apps, facilitated by application programming interfaces (APIs), third-party personal financial management (PFM) and open banking.
Take, for example, Citizens Bank, an American bank based in Providence, Rhode Island, and once a subsidiary of the Royal Bank of Scotland (RBS). In six years’ time, under new leadership, Citizens completely transformed itself from a loser to an innovator, launching a digital-only bank in 2018 that reaches customers in all 50 [US] states.
Bricks and mortar
Challenge a Millennial to explain where his or her money is physically located, and he or she may respond, “It’s on my phone.” Digital-only experiences are this generation’s modus operandi. The “old” way of doing business is of no interest. They see not disruption but rather the only practical mode of banking, which incidentally offers efficiency through state-of-the-art products and services. From our upper-level view, we see that fintech (financial technology) has brought a revolution in banking.
Going forward, we will all have to accept that the “bank” is no longer physical. Banking has gone virtual. Customers are increasingly reliant on (and trusting) mobile apps and internet banking, investing, financing and so on.
No longer do depositors, investors or borrowers trust in bricks and mortar the way they used to. Today, the old brick-and-mortar hallmark of trust is more likely to stand as a symbol of corporate waste and carbon-footprint insensitivity. While banks—home of the eponymous safe—could at one time take for granted the trust built on their unique ability to safeguard customers’ money, that relationship is being challenged and is no longer, well, bankable.
Both incumbents and disruptors offering the digital services that younger generations take for granted and that older generations are learning to adopt will have to continue to innovate in order to remain competitive. The current pace of change requires agility, top talent to help navigate the brave new world of fintech and digital platforms, and a willingness to take risks.
It also requires that banks adopt business models and practices that build—and rebuild—trust. Last year, I wrote about failed trust and the need for the banking sector to learn the lessons of “loving your neighbor” in the context of the social contract between banker and customer, given the distrust by the latter for the former that grew out of and continues beyond the 2008 financial crisis. We saw that as trust for banks eroded, entrepreneurs on a global scale began to see opportunity.
In order to compete in the digital marketplace, banks can differentiate themselves through the relationships they build with customers, and trust must be a key focus of the strategy. The value of trust was essential in the past and is arguably even more important now.
Algorithms, disruptors and changing values
The banking sector must never forget that trust in banks eroded during the global financial crisis (GFC) as the banking industry faced mounting questions about its business practices. Technology and data now are the factors most directly changing and challenging business-as-usual. They will continue to drive banking innovation and, done right, will result in sustainable growth. Growth will depend on the strategic and continuous creation and delivery of banking products and services driven by algorithms that require current, accurate, transparent and predictive data.
The expanding role of data in the banking sector is elevating the risk to customer trust. Each data breach or misappropriation of personal data that makes headlines threatens the foundational trust that banks rely on. As Ginni Rometty, IBM chairman and its chief executive officer for over eight years, underscored during the 2020 World Economic Forum (WEF), “People have to trust the technology… [E]verything about it bases itself in data, and it [raises] the question, then, of trust at the individual level about the data [and] at a company level.”
In many ways, algorithms are supplanting the relationships banks built with their customers during face-to-face interactions and undercutting a bank’s ability to attract customers simply by having a physical presence in the community. Algorithms allow businesses to know what their customers want or need, even before the customer knows, and they can be at the right place at the right time, all the time.
Enterprises such as Ant Financial, PayPal, BlackLine, Betterment, Venmo, Stripe and Chime are entrenched in changing the ways we transact business and exchange currency. And there are thousands of smaller startups in the marketplace bringing even more disruption. Disrupters disrupting the disrupters. That’s a lot of disruption and competition for customers and data—the best data, meet-the-customers-where-they-are data.
Attendant, as well, are irreversible cultural changes that are impacting businesses globally. Consider the focus that has been placed on reducing one’s carbon footprint, defining one’s corporate purpose, the #MeToo movement, the growing conversation around stakeholder capitalism, and the opportunities and concomitant risks of the expanding use of data in almost every aspect of business and daily life.
Values are driving consumer behavior now more than ever. It may yet be too early to predict the extent to which activism, environmental awareness and stakeholder capitalism will shape business models and practices in the long term, but already they are having a visible impact. Companies are disclosing ESG (environmental, social and corporate governance) practices in annual reports, implementing policies of inclusion and diversity, addressing their environmental impacts and adopting data-privacy and -protection tools. It is reasonable to believe that these practices will continue to impact consumers’ decisionmaking processes.
Being relational in an age of algorithms
So, what should bankers do about all this change? Along with creating business/economic opportunity, data and digital innovation, market disruption and changing customer expectations are presenting banks with opportunities to focus again on their ability to be relational and to build trust. Sustainable growth among banks will depend on their relational capacity and the level of trust banks can create.
The term relationologyTM was coined by Matt Bird, a clever thought leader and management consultant from Wimbledon, England. Bird studies how humans interact in work environments. Understanding relationologyTM can lead to a deeper understanding of the way workers are inspired and customers are attracted. Authenticity, integrity, trust, character and competency are key elements of relationologyTM and are at the core of customer success.
The theory of relationologyTM is applicable to banks. Their success depends in large part on their ability to build relationships with current and prospective customers. Banks that understand the value of their ability to be relational will differentiate themselves in a crowded algorithm-driven marketplace and be better positioned for stability and growth. Understanding consumers’ broader values and priorities will enhance the ability to build those relationships, mitigate risks to them from external or internal threats, and attract those consumers in the first place, even without the visibility that bricks and mortar provide.
Lessons for bank leaders and board members
The digital revolution and fintech have forever altered the transaction landscape of the financial-services industry. Yet the notion of trusted relationships will endure. Ten years from now, the brick-and-mortar bank may exist as a kiosk in a coffee shop on the ground of your office building, offering 24-hour, live-person video banking and customer service. The relational skills required of that video banker are the same as those of in-person tellers—listening to clients, understanding their needs, relating effectively and communicating clearly.
Board members will oversee a very differently constructed organization. Open-mindedness to dramatic changes in a business plan will be a key attribute in an astute board member, as will the capacity to understand the P&L (profit and loss) impacts of being a technology company versus a savings-and-loan-oriented institution. As financial-services providers, banks are creeping closer and closer to functioning like tech companies.
Changes will continue at a rapid rate whether bank leaders and board members are ready or not. Leadership composed of a board and management biased towards maintaining the status quo or reliant on past successes to the point of complacency will undoubtedly miss strategic opportunities.
Corporate-governance excellence is the foundation of long-term sustainability. Effective corporate governance is strategic and more about opportunity than it is about compliance. As digital innovation, data, marketplace disruption and evolving consumer behavior and expectations continue to be the norm and challenge business as usual, banks again have the opportunity to differentiate themselves on the matter of trust. In addition to ensuring that relevant technology skills are present on the board, board members and senior bank officers who invest the time and effort to understand the real value of relationships—and being relational—will more effectively navigate the debate of how best to position their organization as a bank for the future.
In the future, a bank’s relevance will be defined by stakeholder relevance. Banks that thrive will be composed of managers and board leaders who genuinely relate to customers, employees, shareholders and who understand all stakeholders’ interests. The job of assessing creditworthiness and attracting deposits may continue similarly to the past, but future banker success will also be defined by the bank’s relationologyTM.