Are you ready for the next big technological revolution? The banking sector needs to adapt for survival because the age of digital transformation has arrived. Will they be able to transform themselves or will they lose the battle to become digitally proficient?
Quick takeaways if you’re in a hurry
- New customer centric players are entering the financial services market, and traditional banks are quickly discovering that their market position is under threat from digital advancements
- Existing banks face a challenging transformation if they are to adapt both their infrastructure and their culture to allow them to succeed in the digital space
- Digitally savvy consumers are expected to comprise the majority of the consumer spending market by 2025.
Read on: The banking sector must embrace digital transformation[estimated reading time: 8 minutes]
“Emerging alternative non-bank players – more commonly known as Fintechs – are beginning to transform the financial sector by revamping offerings and solutions in the new digital landscape; some creating sustainable disruption practices while others are enabling their clients to do more with less.” [Deloitte: Digital Transaction Banking, Opportunities & Challenges]
The financial services industry is in the midst of a digital transformation. It’s most typically characterised as a battle between old and new, with new innovative businesses competing against traditional banking service providers. But can banks adapt to fulfil the evolving needs of their customers in the changing financial services marketplace?
The rise of the digitally savvy
It is the need of consumers that is driving the revolution in the banking industry. In it’s report Digital Transaction Banking, Opportunities & Challenges, Deloitte estimated that by 2025, “Generations X, Y, and Z will account for 75% of the total USD 2.5 trillion spending power of end-consumers in Australia, Hong Kong, Malaysia and Singapore.”
This combined spending power of the digital natives and digitally savvy requires banking to join the digital space. For traditional banks this means they must now adopt a strategy of conquer or be conquered, and that isn’t an easy move to make.
“A concern that the banks have is the arrival of big ecosystems that will replace them, so Google, Facebook, Apple, etc,” says Alessandro Hatami, former digital payments and innovation director at UK bank Lloyds.
“These are customer-based. The customers are already users of these environments. If they start pushing financial services to their own customer bases, these ecosystems can potentially take customers away from the banks.” [source: How technology will transform banking in 2016]
An industry evolution or revolution?
Some commentators liken the revolution that the financial services industry faces to the changes that home entertainment underwent when Netflix replaced Blockbuster, or the impact that Spotify had on the music industry.
Digital technology is likely to change both the face and structure of the banking industry. The biggest challenge that banks face is that becoming digitally adept requires both a cultural and physical change to their operating structures. And it needs to happen fast.
In today’s banking world, existing banks are struggling to realign themselves. Many are battling infrastructures that are not suited to the flexibility they will need in digital environment, with legacy technology and business processes that do not fit with the fast paced developments and collaboration that is typical of the digital age.
Adapt to survive
Largely for the existing players their future can be split into two scenarios, as outlined in Accenture’s report The Future of Fintech and Banking: Digitally disrupted or reimagined?.
Scenario 1 is “Digitally Disrupted”. In this scenario banks are unable to complete their own internal evolutions in order to compete in the new digital marketplace. This inability to evolve could be driven by existing regulations or cost structures. Whatever its cause, the end result is that traditional banks are left behind as new players enter the market.
The new players are customer-focused where existing banks have become product-centric. This leaves them well-positioned to introduce new, more effective, financial products and services that are attuned to a digital age.
Scenario 2 is “Digitally Reimagined”. Banks succeed in transforming their product-centric structures and become more customer focused. Their ability to imagine and improve their customer’s lives with smart service and digital platforms carries them on the path of innovation. They successfully maintain their presence in a digitally focused marketplace.
Whichever direction traditional banking follows, it’s important that they recognise that playing in a digital marketplace requires more than just a desire to make customers happy. Businesses that embrace technology and innovation are more than just customer centric, they are culturally unique.
For traditional banks to move themselves forward in this new digital space they will need to adopt some smart behaviours to support a cultural transformation:
Embracing open technology/innovation
Open innovation ensures that technology evolves with multiple internal and external inputs, continuously adapting and developing to match the evolving needs of the end consumer. This kind of collaboration usually requires open access to technology for developers who compete and vie to create the next step change in innovation.
Collaboration is an essential facet of digital business. Not just collaboration within technology or inside a platform, but also the wider reaching collaborative opportunities that come from working between and alongside other industries and businesses that service the same customers.
Banks are no strangers to collaboration within their industry: working together across payment platforms or regulatory requirements. This larger opportunity for collaboration will require a step change towards more lateral and innovative thinking.
Further to the belief that banks need to create new technology in order to embrace the digital age, there is a theory that they could just invest in other businesses that do new technology exceptionally well. The question is whether this will help or hinder the transformation of the banking infrastructure.
This is highlighted by Accenture: “The fact remains that innovative start-ups have a high innovation quotient, but need capital, and established financial services firms have lots of capital, but need to increase their ability to innovate.”
Of course investing in companies that specialise in new technology neither makes you act like them, nor guarantees you access to their technology for your own use. It’s unlikely that investment alone will effect the transformation that the financial services industry requires.
Existing banks have a challenging five years ahead of them as they brace to deal with the impact of new entrants into their marketplace. It’s not enough to have access to the right products: they are facing a new digitally savvy breed of consumers who require the right service delivered through smart digital technology across a multitude of channels. Innovation needs to happen now and continuously into the future in order to protect and maintain market share. Traditional banks will need to embrace the challenge and find new ways to compete with the new and innovative offerings that new digitally focused businesses can offer.
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