Insights from this year’s International Heads of Retail Annual Dialogue, held in Dubai in March 2019 and attended by heads of retail banking from the Middle East, Asia Pacific and West Africa, reveal that banks are close to an inflection point which could see them lose their customer mandate altogether.
In kicking off the dialogue among retail banking leaders, The Asian Banker chairman Emmanuel Daniel called vital attention to how a traditional institution maps its own journey. Financial institutions are currently in a phase where they are the net beneficiaries of the digital divide, as regulators have mandated that digital transactions are funnelled through these institutions. The key questions, he said, are identifying the point at which traditional institutions lose their mandate, the trigger point that can disintermediate traditional financial institutions and the ways to overcome those challenges.
Key issues for banks
The bankers agreed that banks are close to an inflection point. They are so stuck in silos, one banker said, that they run the risk of being marginalised and relegated to being “dumb pipes” that simply carry transactions, unless they take action and changes their models.
Once they lose the trust of their retail customers, another observed, the door is open for challenger banks. A key example is Australia, where a Royal Commission exposed appalling behaviour in retail banking and investment management practices. Following the exposure of a breach of trust at financial institutions, a flight of customers veered away from the banks.
Another banker observed, if banks don’t offer convenience and lower costs, they would eventually be out of business.
Collaborating to create an ecosystem
An increasingly important practice for overcoming these issues and achieving success is collaborating with third parties and creating an ecosystem of solutions to meet customer needs.
Tech companies, for example, have flourished by creating ecosystems and partnerships. In Southeast Asia, ride hailing company Grab can onboard customers faster than banks and has used partnerships to expand into lending, payments and insurance, and has leveraged relationships with retailers such as Lazada or Qoo10.
Banks, however, have traditionally been poor at collaborating with third parties and creating partnerships, at least partly because they do not trust other players.
While successful partnerships have thus been rare, one area where banks did succeed in collaborating is bancassurance. Rather than producing their own insurance products, they have often taken third-party products and sold them.
Seeing the potential value of changing their models and collaborating more, a few banks have started to create a broad range of partnerships. In India, for example, banks and fintechs initially tried to intimidate each other. Over time, both realised that they won’t flourish unless they partner. Some Indian banks have thus developed partnerships that result in win-win solutions, with the bank benefiting from more spending by the partner’s customers and the partner gaining access to the bank’s millions of customers. Whereas fintechs often only offer single products or piecemeal solutions, banks can benefit from leveraging these partnerships to offer a full suite of products and become the primary financial services provider to customers, who want a bank who can offer them everything.
Another example of successful partnerships is in the UK, where there are nearly a hundred third parties in open banking. Whereas many bankers expected open banking would be used to serve individual clients in retail banking, the primary focus has turned out to be micro, small and midsize enterprises. Third parties specialise in aggregating accounts for SMEs, giving better automatic funding to SMEs based on account aggregation, helping SMEs with accounting or finding the best services. Incumbent players are mastering the partnerships, and customers appreciate being able to log into mobile banking app and see all their accounts. On the other hand, the 40-odd digital-only challenger banks licensed by the FCA have been surprisingly clumsy and are staying away from open banking.
Looking more broadly, banks will succeed by adopting a different mindset and thinking about platforms rather than in terms of traditional organisational structures where departments operate in silos, or in terms of products. Banks need to consider what the customer wants and sell the things they are good at, by collaborating with big techs and fintechs as well as by using the infrastructure and technology they have. Open banking now gives banks new opportunities to export their services to third parties in additional areas and to import third-party product to sell to their customers.
Partnerships and an ecosystem are not enough, however, without focusing on improving the customer journey and ensuring a culture of customer obsession. Banks that succeed will transform the customer journey, which in turn leads to a personalisation of services for the customer.
The tone at the top is critical
To address the challenges inside the bank, direction has to come from the top, at the board and management levels, on how to serve customers, how to balance making investments with focusing on the balance sheet and shareholders, and how to collaborate with fintechs.
Once the strategy is clear, management needs to address the culture, change the value system, overcome siloes, and ensure accountability. Staff then need to work with the strategy, use data, and build their capabilities. While regulators still build rules around products, compliance still requires product protocols and the bank still needs back-end controls, the tone from the top can help to overcome these challenges.
Moreover, these leaders need to make a fundamental change and get involved in the technology that is driving the business. At many banks, there is little passion in leadership in banks and decision-making power is fragmented, At DBS Bank in Singapore, on the other hand, the CEO spends eight to nine hours per week being involved in spreadsheets and coding, which has driven change. Another good example is large fintechs in China such as Ping An, where founders are still running many companies with senior management involved in all level of decisions.
Gaining competitive advantage
Retail bank leaders also had insights into how banks can compete successfully.
To begin, one banker observed, what customers really care about is quality, cost, and access, since humans want convenience. Just as the advent of convenience stores led to changes in consumers' lifestyles that shifted them away from buying cooking ingredients at traditional markets every day, retail banks can offer convenience in financial services that feeds upon people's preferences for easier access to banking and could be a disruptor. The future lies in using technology in a way that maximises convenience and quality while reducing cost.
The key question, then, is how banks could overcome the massive friction within silos and move to a better model. Rather than playing technology companies’ games, banks can succeed by understanding what they’re really good at, finding really good data, using it for pricing, competing, and protecting their advantage.
Banks can also think about technology differently. While almost every bank says it wants to be a technology company, banks aren’t spending money the way technology companies spend. Rather than focusing on technology, they need to think about customer needs and then ask technology staff to deliver. If Union Banks of Switzerland took the approach of some technology companies, saying it would not pay dividends and would spend a fortune on technology instead, one banker radically suggested, the stock price would explode. “If we don’t spend, it’s a slow death.”
Whereas some banks say that regulation is a challenge, the real issue can be a lack of relevant talent. While banks can pay good salaries and have a corporate structure, they don’t attract makers and may need to adjust their practices to recruit the right type of people to build things.Liv bank in the UAE, for example, deliberately hired staff without a banking background to develop an innovative new digital banking product.
Winning the customer trust and mandate
Banks are slowly coming to term that the loss of customer trust, the raison d'etre of their business and existence, is at stake.
Banks' leadership are highly aware that they need to re-organise their business and operating models around customers' core needs yet they are mired in operational silos and legacy systems that hamper them from getting a deep understanding of who their customers are and what they really need. This is the fundamental data challenge that divides banks from the big tech and fintech competitors today.
Some leading top-tier banks are starting, however, to see the light. They realise that the future lies in embedding finance into, from a business-to-consumer (B2C) perspective; consumer lifestyle and life ecosystems, and from a business-to-business (B2B) perspective; business supply and value chain ecosystems. They have to transform into marketplaces and platforms that revolve around customer needs in order to realise the network benefits of aggregation, alliance and collaboration.
Delivering a differentiated customer experience
Most of today's disruptors began with the desire to solve real world problems that people have around money and financial services that present the greatest stress points in people's lives. Where commercial banks saw products and transactions, this new breed of companies identified solutions to reduce the pain points of users.
They innovated their business models around customers' core needs, not compliance regimes, by simplifying solutions built on open platforms and scenario-based ecosystem. They offered value propositions centered on better accessibility, lower cost and affordability, customised and easy to use.
Disruptors didn't sell products in the first place. Their approach centered around services as a key to sales. By getting the users first, and then starting to monetise the offerings by cross-selling and up-selling later they introduced a fundamentally different customer engagement model.
In the future, retail bank leaders acknowledged that offering what is on a bank's digital product and service shelf will no longer be sufficient as clients won't have time anymore to check and compare products, services and costs. This will be performed by sufficiently autonomous bots crawling for services in the open banking space.
Distributed ledger techonology in combination with the Internet of Thing (IoT) will significantly reshape the way customer experience is created today. At the moment, financial players don't have sufficient amount of information in order to make real-time decisions but those technologies are going to provide the unique opportunity to meet customer needs better in real time with 100% transparency. For instance, in situations where a customer was involved in a car accident or diagnosed with health issues, the system could trigger real-time insurance policies. Financing a new car or opening an account could be as simple as clicking yes in response to a note from your bank. Leaders in this space will customise the solution to each person's unique needs at any given time or place.
Data and digitisation
Digitisation and data are givens, one banker observed. Where banks are struggling is in corporate culture and getting the various functions to leverage the data to collaborate from a customer journey and customer experience viewpoint. While the number of fields in data entry that are required to onboard a customer may seem minor for example, it does play a part in the success and banks that only require five to seven fields compete better as compared to the average of eight to 12.
Digitisation, therefore, is a key part of making the customer experience better, and it is a space where bankers can emulate tech giants. Banks clearly cannott run like Uber, which lose substantial sums and still see their company valuation climb higher. They can follow the lead of companies such as Ant Financial, which allows lending to small businesses, provides instant feedback, does billions of transactions, and sends out zero statements.
While data is important for achieving that personalisation, bankers had differing views on whether they have the data they need.
Banks sit on huge amounts of data, one said, and the ability to use it gives great insights. When clients use their credit card and spend, for instance, the bank gains insights about their entire history, geography, spending, loading, and mutual funds that relationship managers as well as call centres can use when they meet clients.
Another said, however, that 90% of the data that banks think is valuable is small data and a waste of time. What banks don’t collect, for example, is detailed data such as bar codes. “We’re stuck in a silo. Who cares once something is sold? It doesn’t predict behaviour.”
The International Heads of Retail Annual Dialogue, which is held in conjunction with the Excellence in Digital Finance Awards, is the single largest roundtable for senior executives from banks, insurance, and fintech companies in the Asia Pacific, the Middle East and West Africa, to address collectively the transformational changes brought on by digitisation in retail financial services and respond to the latest threats and opportunities in the industry.