This is the age when digital technology transformed our society in arguably the same way as the industrial revolution and electricity defined progress in previous centuries, which remarkably makes this 21st century to be remembered forever. There is a great revolution in how organizations operate and deliver services to consumers with the advent of smart phones, cheap cloud computing and majorly through the advances made in telecommunications. The traditional industries like retail, media, mobility, hospitality are transformed by the digital first model and created commercial success by leveraging technology to create superior customer value. This can be easily demonstrated by the likes of the people towards the Amazon, Netflix, Airbnb and Uber etc.,
What does a digital first future look like for banks? Are banks ready to make the transition or will there be emergence of leader from new Fintechs?
A recent study provides us with some useful insight based on responses from over 1000 banking executives globally. It explains in detail about how the industry assesses its digital transformation journey. The ability of the banks to create better customer experiences and higher operational efficiencies using technology is the simple definition for the digital maturity. However, the different levels of maturity that banks need to achieve to be leaders in this digital centric world has to be defined in order to visualize a digital future.
Banks need to provide access to their services via mobile/web in an efficient manner. This serves as the most basic level. Apart from basic services like making payments and checking balances, more complex transactions like mortgages and lending should be made available through digital channels without manual intervention. This is majorly implied in retail banking. Innovation on products and services using digital would be the next level of maturity. The services like proactively taking action to help a customer in financial distress and leverage in house and 3rd party data with consent to personalized products or offering a loan during the purchasing journey are all some obvious examples for this. The other level of innovation could be offering more attractive services in partnership with others like we have seen the likes of Klarna, PayPal and Laybuy do successfully in the Buy Now, Pay Later model. Firms also need to create the ability to continuously drive such innovations at speed to meet the evolving nature of the consumer and competitive landscape in order to achieve digital leadership. Thus, the fundamental requirement for digital leadership is agility.
So, how are banks faring in their quest to achieve this high level of maturity? In meeting their Digital Transformation Goals only 40% have made their significant progress. This is known by a survey and this is in stark contrast to start-ups like Monzo, Starling and Revolut. As they have demonstrated their ability to achieve a high level of Digital maturity by creating digital only propositions at speed and innovate on the product cycle in their area of specialization. There is no legacy that makes a digital led model easy and these fintechs have arguably much smaller portfolios. The advantages that incumbent banks can use to reclaim a leadership position with their customers is that the large geo footprints and diverse product portfolios. Some areas have shown great progress. To access basic banking services most banks have now invested in a robust mobile platform. HSBC’s global money account and Citibank’s global wallet are some innovative products. These take advantage of their global liquidity positions to offer a competitive multi-current account to their expat and in this very lucrative market more global customers – directly competing with the various Fintechs. In order to achieve this digital first model across the entirety of their business, there are more needs to be done. The high-cost income ratios of most incumbent banks especially in Europe has evidenced that complex transactions like getting a mortgage or taking out a secured loan are still not digital enabled and the degree of automation for back-end processes is still high. So, what’s holding these larger incumbents back?
In order to overcome some barriers like lack of investment in skills, the pandemic and the change in culture said by a study to make a progress, the underlying issues creating this organizational inertia against change must be looked after by the banks. This inertia can be overcome is the highly important good news. As these Incumbent banks can move incredibly fast as most did to support customers with no access to branches. The opportunities to create new areas of growth in areas like retail and transaction banking using a digital first model while still maintaining their traditional trading revenue have been demonstrated by Companies like Goldman Sachs. Banks have huge opportunity to leverage the full power of technology to create unmatched customer value and win the race against FinTechs.
A bright future benefiting both customers and share holders can be created by the banks by defining a clear strategy and a will to overcome this organization inertia via the right incentives and operating model changes.
