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April 9, 2015updated 22 Sep 2016 11:46am

Will fintech digital disruption lead to banking destruction?

Fintech White Paper: Accenture and the BBA say digitisation must become ‘business as usual’ for finance.

By Vinod

Digitisation is changing many industries across the world and altering the way we as individuals and companies operate. Banking is no different.

While banking has been on a path towards digitisation for a number of years, it is the advent of the mobile device that has dramatically accelerated the pace of change. We have gone from almost nobody banking via their phone to millions of people using their apps to check their accounts and make payments every day.

This is changing not just the way we bank but also the way banks have to interact with us. The number of people going into branches to do their banking is falling dramatically (by around 30% in the last three years) and visits are often now for more complicated issues.

Many of these products are no longer offered solely from within the banking industry. Digital is helping to break down barriers to entry and the pressure is on to ensure that banks are as up to speed as their potential competitors in the products and services they are offering.

Even new banks are divided on whether to offer universal services. Metro Bank, for example, wants to build up to around 200 stores, a fraction of what the incumbents have but sufficiently large to give it a significant footprint when combined with its mobile offering.

This contrasts to more established banks whose task it is to ensure that their omni-channel offerings are seamless, so that a customer feels at ease whether they are walking into a branch, using the app or talking to someone on the phone.

Another challenge for the banks is to modernise their IT systems to enable the more advanced digital services to be delivered. This is a major test for the banks given the pressure from regulators and politicians to ensure continuity of service, particularly as customers are increasingly used to being able to access banking services 24/7.

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The balance that regulators must strike is protecting consumers and ensuring stability, while not hampering innovation or competition. That can be done by focussing on regulating activities rather than merely institutions, ensuring a level playing field between the banking and non-banking sector.

What this report shows is that banking ten years hence is likely to be dramatically different from today. If the banks get it right then everyone can be a winner, but it is a massive challenge and the journey has only just begun.

The rise of digital and how the banks have responded

The digital revolution is gathering pace across all sectors, with consumer behaviour and innovation driving a rapidly expanding market.

We have seen digital evolve from a mere channel for distributing product into the core of the proposition in its own right. The new ecosystems businesses are creating are providing further fresh opportunities.

BBA on Digital Disruption, Evolution of Digital Business

The banks have made significant strides in developing their digital offering and a wave of innovations has driven a boom in the day-to-day usage of their digital services. The growth has become explosive as internet access has been supplemented by the use of mobile devices.

For the industry as a whole, we have seen the use of mobile UK banking services more than triple with monthly usage levels of 8% in 2010 jumping to 27% by 2014. YouGov polling carried out for the BBA in June 2014 showed that only 16% of customers never use online or mobile banking.

This digital offering is changing people’s behaviour and enabling them to control their banking more effectively. Lloyds estimate that around 60% of mobile banking logins are simply to check balances and statements.

Banks have also enabled customers to ask for alerts to help them control their accounts better. Lloyds Bank alone sends 3.8 million text messages to its customers a week. Such messages are normally triggered by customers approaching pre-defined balance levels or to warn them that they are likely to incur charges.

All of this gives bank customers the opportunity to adjust their balances more effectively and reduce unwanted account charges. In our conversations with the banks this ability to empower the customer is a key driver behind the digital offering that banks are making.

This is an extract from Digital Disruption UK Banking Report, from the British Bankers Association in partnership with Accenture.

Banks are responding in various ways to the changes that digital is bringing to their industry, and the relentless pace of digital innovation means that they cannot afford to stand still. Digital disruption will continue to reshape the market over the decades to come, bringing pressures to deal with across numerous fronts.

Changing customer behaviour

The propensity of UK consumers to buy products and services online is increasing, and banks’ digital services must be as seamless and frictionless as possible. However, research shows that banks still have some way to go to deliver the experiences that customers are looking for.

BBA on Digital Disruption, Customer Survey

Much of the challenge for banks then is how to create the warmth and engagement of a face-to-face exchange though a remote channel, moving digital beyond a simple driver of transactional behaviour.

Emerging competitors and new entrants

The rapidly growing customer appetite for digital banking has made it easier in some respects to enter the banking marketplace, with lower barriers to entry attracting a record 29 firms to apply for banking licenses from the UK financial regulator, the Prudential Regulatory Authority (PRA) in 2014.

A fresh injection of competition such as this will undoubtedly bring new ideas to the market. This is in stark comparison with 2010 when Metro Bank was the first new bank to obtain a license since the 19th Century. This is a challenge to which the incumbents must respond.

Regulatory implications of the digitisation of banking

At the BBA/Accenture digital conference in November 2014 Peter Sands, CEO of Standard Chartered Bank, made the analogy of the banking industry pre the digital age being like medieval knights in a castle protected by a moat, with that moat being regulation.

The digital revolution is akin to cannons arriving and removing the protection of the moat. In essence he was arguing that the digital revolution would allow non-bank digital providers to offer bank-type services without becoming banks.

We are seeing this to a certain extent already with Google Wallet, Apple Pay, payment via Twitter, Moneywise, Amazon Lending and so on. As yet none of these has become a mould breaker in the way that cannons were but we have seen enough in other industries for it to be a real enough threat to banking.

Hard-wired complexity

Core complexity presents a number of challenges for the banks:

  • Reduces agility – the rate at which decisions can be made is slowed by complexity, with creaking IT struggling to keep pace with the changing demands of the business.
  • Reduces security – it is much harder to protect complex systems, and at a time of rising concerns over cyber-security banks must ensure their core IT is fit for purpose.
  • Increases risk – more cogs in the system means more opportunity for things to go wrong. The net effect of complexity is to reduce overall resilience (as demonstrated in recent systems crashes at some of the UK’s largest banks).
  • Increases cost – every time you want to do something new or innovative, you need to break something else to make it work.
  • Damages trust – customers in the digital world will be increasingly unwilling to tolerate systems outages that prevent them accessing their data (not to mention their cash).

Conclusions and call to action

It is clear that digital disruption is now mainstream and that the banking sector has to treat this as business as usual. The pace of change is relentless and the expectation is that all of the banks will need to focus on:

  • Investing in forward-looking activity to spot the disruptions ahead of them.
  • Working to create a faster adoption cycle for new services and solutions.
  • Continuing to evolve the non digital channels, including Branch, to drive changes to the role and structure of their networks.
  • Being clear on their role in the emerging "ecosystems" that will form around customer events.
  • Changing the cultural balance inside the banks to one which is more agile over procedural and one which balances innovation with risk.
  • Continuing to focus on "fixing the core", investing in resilience, simplifying the processes and services that sit around the core product sets, and allowing banks to provide better services, more quickly to customers.

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