“They all want to eat our lunch. Every single one of them”, Jamie Dimon, Chief Executive of JP Morgan, stated in 2015, referring to the growing threat of Silicon Valley businesses to banks. And as the Second Payment Services Directive (PSD2) is coming into play early next year, his warning is becoming ever more significant.
With the advent of PSD2 and Open Banking initiatives, the regulatory barriers that have kept non-bank competitors at bay are falling. Banks will soon be competing with
emerging fintechs as well as tech giants like Amazon or Facebook who seek to hijack the consumer journey or to “reinvent the entire thing”, in the words of Marc Andreessen. For instance, such companies could soon be exploiting Application Programme Interfaces (APIs) to create apps that combine services from different banks and offer financial recommendations, relevant products and payment services in a personalised way.
This has the potential to reduce banks to a mere utility in the consumer journey. As agile tech companies raise the standards of customer experience, people won’t hesitate to use services better tailored to their needs. Indeed, 73% of millennials have said that they would be more excited about a new offering in financial services from Amazon, Facebook, PayPal or Square, than from their own traditional bank.
The issue is pressing as banks’ revenues are at risk. Estimates for the loss of market share to new payment initiation service providers are high as 33% for online debit card transactions by 2020. To remain relevant and competitive, retail banks need to innovate and fast. New technologies and business models must be explored. A shift from a product-focused to a customer-centric model will be vital, specifically a focus on technologies that will provide a more helpful, intuitive and seamless user experience.
Customers at the heart
Banks need to start empowering their customers to manage their money in the most useful and convenient way possible. Crucially, this change serves as a real opportunity for the IT department to drive strategic change within the business.
The CIO will need to assume responsibility of leading the creation of apps that offer the full spectrum of banking services and unified platforms that offer services, from budgeting and forecasting, to financing options, wealth advice, proactive alerts, automated virtual assistance and personalised suggestions. This will enhance the customer experience, improve brand value and reduce banks’ threat of displacement.
Cognitive services and analytics
Banks are sitting on a potential goldmine of insight into consumer behaviour that can be gathered from their vast data on customer spending habits and financial health. To predict customer opportunities and risks, IT departments need to understand how to start exploiting these untapped data sources before they are made available to third parties early next year.
To evaluate consumer sentiment, identify what customers want and moderate content automatically, CIOs must understand how to implement advanced analytics of customer data in combination with artificial intelligence algorithms. Taking advantage of machine learning tools will be pivotal too. One European bank reversed a declining customer base by applying machine-learning algorithms that predicted which active customers were likely to reduce their business with the bank. The new insights informed a targeted campaign that decreased churn by 15 per cent.
API Management solutions will be essential in catalysing these innovations and stimulating engagement with developers. This will pave the way towards seamless integration with partner entities, creation of new digital channels and apps, and a unified experience across channels. In turn, banks will be able to attract new customers and drive deeper engagement with existing ones.
Some banks are already taking steps in the right direction. RBS is encouraging API experimentation with third party developers via its BankofAPIs.com, while Barclays has launched an innovation centre in Shoreditch, where over 40 fintech start-ups are laying the foundations for the bank’s continued advancement.
PSD2 and Open Banking present a very real challenge to the traditional retail banking model. Although banks have first-mover’s advantage with their vast existing customer-bases, time is quickly running out for them to stay ahead of emerging competitors. For banks to retain consumer loyalty and ownership of the customer journey, adopting customer-centric business models and innovating rapidly with these new technologies will be critical.
Crucially, to propel this strategic business change, CIOs must take ownership of the transformation and ensure their IT departments are in gear, as their resolve will be at the heart of this transformation.