Digital Disruption: The Race to Create Truly Digital Financial Services
It cannot be denied that digital is the future of financial services. The rise of neobanks, rapid digitisation at established institutions, rapid uptake of digital wallets and even currencies - there is absolutely no doubt where the future lies. However, the question becomes exactly what form that future will take and who will dominate it.
Neobanks have certainly had a very successful few years since they emerged into the financial services market. They have proved much more adaptable than their incumbent counterparts, enabling them to quickly adjust to the needs of their customers. However, their relatively small size has been a major limiting factor and recent reports suggest that their rapid growth is starting to run out of steam.
The big, well-established retail banks continue to dominate the marketplace and many are beginning to form partnerships with fintech firms in order to accelerate their digitisation. However, they are generally delivering exactly that - digitisation. In many cases, banking websites and apps are merely a digital version of the services they would ordinarily be offering over the phone or in branches. They have effectively just turned a paper bank statement into a PDF file.
While both neobanks and the more adaptable retail banks have adapted their apps to suit customer needs a little better by prioritising a single digital product (generally chequing accounts), they still treat other products like loans, credit cards, insurance and so on as add-ons. They are available, should a customer request it, but they are not being effectively marketed as a solution to the customer’s needs.
The problem is that the rest of the tech world outside of fintech is already steps ahead with its focus on platforms. The future, it would appear, lies in the creation of a holistic banking experience through such platforms.
The rise of platforms
Let’s take a look at the likes of Amazon. They started out as a simple online book marketplace. From there, they have expanded into a vast array of other services. Over the years, they have incorporated ebooks with the creation of the Kindle and its associated store, added audiobooks and several music services, started their own media streaming service, opened grocery stores, developed extremely popular web-hosting services, formed their own international logistics service and created a household AI to bring it all together - Alexa.
From that basic marketplace, Amazon is now an integrated platform for an array of products and services. You can see similar success stories with Apple, Microsoft, Facebook, Google, Alibaba and Tencent. Between them, these seven companies control 69 per cent of the global platform economy - an economy that KPMG estimated to be worth in excess of $7 trillion in 2018.
In each of these cases, a customer-centric approach was the leading factor, with the necessary technology developed to achieve the goal of solving specific customer problems. The results are seamless and intuitive mechanisms of interaction through which value is exchanged.
The partnership between ING and Yolt is an excellent example of this customer-centric approach. Effectively, the bank is disrupting itself by providing an aggregator app that competes with its own brands and products. The platform aims to provide the optimum value for the end user, even if that means promoting a competitor’s product over their own.
“If you want to be the ‘go to’ place for financial services, or for services that go beyond banking, how credible are you if you only offer your own products?” said ING CEO Ralph Hamers at Money20/20 in 2018. “If you truly want to empower customers, you have to provide them with the most relevant offering - even if some of the products and services are not your own.”
Data is the key
As we said earlier, neobanks have something of a headstart in the platform approach to digitising financial services. They have already been following this template by adding extra services from their simple start point of providing an online payments service or reducing costs when spending money overseas. However their small size is still a limiting factor.
Established banks have one pivotal advantage over neobanks in the form of customer data. The sheer quantity of customers they already have for their wide arrays of products means that they can already determine the habits of individuals, which is an essential requirement in an effective platform. However, that data needs to be first mobilised and then humanised.
What do we mean by ‘mobilised’ and ‘humanised’? The former is simple: in order to get a holistic view of a customer’s needs, a bank needs access to a wide variety of data. Open banking measures are a major factor in this as they enable the flow of data between providers. In the fintech world, a great example of this process is Kabbage. It enables customers to get a loan faster by allowing lenders access to the customer’s banking data, enabling them to do their underwriting almost instantly and vastly more accurately.
Next comes humanising. This requires the financial services provider to use and deploy the data they have accumulated in a way that their customers will find useful. This is achieved through timely push notifications and bots. These are both already in use in simple forms. Notifications are used to alert customers when money has left or arrived in their account, for example, and bots are typically used as a self-service tool to complete basic processes. However, both of these have vastly more potential.
A further humanising opportunity that has yet to be developed comes in the form of voice-based services like Siri and Alexa. A 2019 survey found that a quarter of American households already have a smart speaker, yet banks have yet to tap into this lifestyle trend. How long will it be before we can ask Alexa to pay our bills for us?
Holistic experiences
As it stands, our digital lifestyles still require a lot of micromanagement. Our smartphones are packed with dozens of apps, none of which fully integrate. We have individual apps for emails, messages, social media, other media, travel and navigation, retail, finances, and more. Creating a simpler, more holistic experience will require significantly more automation across multiple channels. Creating these kinds of experiences will solve the one issue that current digitisation efforts have suffered from - that of siloed products.
Let’s look at a few hypothetical examples of holistic experiences:
You walk into a shopping mall and your smartphones geolocation system notices this. You enter a specific shop that it has recorded you taking an interest in - perhaps you searched their online catalogue before or you have been to the shop multiple times. Your banking platform cross-references the cost of that store’s products with your available cash budget and sends you a push notification that you cannot currently afford the item you want to buy. Perhaps it will alert you to the fact that a bill is due soon and making an expensive purchase will not leave enough money in your accounts to afford it. On the other hand, it might recommend a small loan with a favourable repayment schedule or a suitable credit card to help you buy what you want now and still pay off that bill later. In either case, the money could be delivered to your accounts and ready to spend while you are still stood in the store.
Perhaps you are more thrifty and have set yourself a savings goal - a goal that your banking platform has just discovered that you have reached. Having notified you of this achievement, it could suggest a number of options. Perhaps it can advise a higher risk investment approach for the excess savings, creating the opportunity for a greater return while still keeping the core savings safe. Alternatively, it might suggest diverting the excess into your budget for some reward or gift that you want. CaixaBank in Spain already offers the latter, thanks to their partnership with Booking.com.
Talking of travel, you could have a platform that sees a flight booking appear in your email inbox and then suggests associated products and services. It might recommend travel insurance, suggest setting up processes for the optimum currency exchange rates or even help you book hotels and car rentals. It could even cross-reference your flight destination with your available travel budget and suggest hotels that match your needs with your spending limits.
The tech threat to big banks
Systems like those described above are already widely available across the tech world. The big seven platform companies we mentioned before are excellent examples, especially since they have access to massive amounts of personal data. However, they are yet to incorporate financial data, meaning that the experiences currently remain beyond our reach. By contrast, banks have all the financial data they could ever need, but no data on personal preferences and habits in order to sync the two.
Suffice it to say, the platform economy is already well-established and it will not be too long before financial services start to be integrated. Apple and Google have both entered the payments industry with Apple Wallet and Google Pay while Facebook has launched its own cryptocurrency. The point at which one or more of the big seven opens its own banking services cannot be far away.
However, all is not lost for the established players in the financial services sector. So long as they embrace open banking and working with third parties in order to meet customer needs, there is still a chance for them. However, they urgently need to find a means of mobilising and humanising the data they have (or can obtain) in order to create the sorts of holistic experiences we described above.