How far can digital go?

We’ve all read the cliches that forewarn the “death of banking as we know it”, but how much is this is wrapped in hype, asks Simon Cadbury?

How far can digital go? Photo by Sergey Khakimullin, iStockPhoto.com

“We are witnessing a digital revolution”; “Welcome to the Digital Age”; “In today’s connected world, banks will struggle to keep up”. We’ve all read the cliches that forewarn the “death of banking” as we know it, but how much of this is wrapped in hype, and how far are they from the truth?

The evidence

In one way, digital progress can be plotted in the loss of the physical objects we associate with traditional banking. The days of paper statements and checkbooks are numbered – there are digital alternatives to cash, plastic and wet signatures, and a question mark hangs over the size and scope of every bank’s branch network. Yet, all of those things still exist.

We’re living in the age of digital

Smart devices have become an essential part of our everyday lives. We spend more and more of our waking hours plugged into digital media; we can monitor our health, energy use and finances in real-time, and everything we own is getting smarter.

So where is banking on the spectrum of digital maturity?

Recent research from Statista shows that online banking penetration in the European Union had only reached 44% in 2014. Other research from KPMG found mobile banking adoption highest in China and India, but even there it had only reached 60-70%. This is a graph of mobile banking penetration by country:

mobile_banking_penetration_graph_2015

Source: KPMG report – Mobile Banking 2015. Produced in collaboration with UBS Evidence Lab (July 2015).

For individuals, security is a significant barrier, and as the frequency and severity of data breaches increases, the challenge of convincing them to “go digital” becomes even harder. For banking organizations, a combination of industry regulation, legacy IT systems, and conservative banking culture acts as a significant brake on progress.

Digital lacks that human touch

Despite the emergence of telephone, internet, and mobile banking, customers still want to talk to real people face to face. Research from Accenture found that millennials, the first generation of ‘digital natives’, value access to real banking staff more than their parents.

Digital-only players may thrive – at the expense of non-digital players?

The success of the modern, mobile-first business model for banking is far from assured, with predecessors (direct banks such as Egg, Smile and the internet-only Marbles card) only enjoying limited success.

To make matters worse, Andrew Bailey, chief executive of the Prudential Regulation Authority, recently raised concerns that challenger banks will never reach the strength in depth within their balance sheet to be able to overtake their larger, more established rivals.

The verdict

There have been a lot of branch closures since the financial crisis, but the very fact that they remain such big news is indicative of our attachment to them. For some banks, branches remain the most used channel, and many customers choose their bank based on which has the nearest branch, while even digital startups such as Atom and Starling are in discussions with the Post Office about providing over-the-counter services.

Rather than spelling the death of branches, it would seem that digital heralds the transformation of the branch. Most banks will reshape their branch networks, focusing on high-value/high-touch services such as mortgages and wealth management, while moving routine transactions to digital banking and self-service systems.

Emerging trends and technologies

It’s also worth considering the multitude of technologies on the horizon that have the potential to transform banking. Predicting which of these will actually transform the market is a mug’s game, but looking at how emerging technologies are impacting banking today is always worthwhile to get a flavor of things to come.

Cloud computing

A recent survey by the Cloud Security Alliance showed that 60% of financial institutions are developing a cloud strategy. According to CIO.com, Deutsche Bank plans to have 80% of its systems based in the cloud by 2020. It seems certain that public, private, and hybrid clouds will play a vital role in banks’ digital future.

Biometrics

2015 was the year that banks started to experiment seriously with biometrics: US financial provider USAA already offers three different biometric login options for mobile customers. But biometrics has been the ‘Next Big Thing’ in authentication for a long time now, and many of the things that have held it back so far haven’t gone away. There is often the need for costly additional equipment, and processes that require verification by a back-office platform can be slow.

Social media

Social media isn’t just a marketing channel; you can already link your bank account or credit card to your Twitter account to buy goods or make charitable donations. La Caixa of Spain has developed a free Facebook banking app, while Facebook recently applied for a patent for social credit scoring. The future may well see banks become an integrated part of our social media ecosystems.

Bitcoin and cryptocurrencies

In the US, the Bank of America has filed a patent application for a cryptocurrency. Banks such as Goldman Sachs, Standard Chartered and UBS see the blockchain’s potential to offer a faster, cheaper, more secure and more reliable banking infrastructure.

The internet of things (IoT)

The internet is starting to incorporate everyday things, and the data gathered from its multitude of sensors will allow banks to learn more about their customers than ever before. The scope of the IoT ranges from the connected piggy bank developed by New Zealand’s ASB bank to the in-home sensors proposed by Deloitte for helping lenders to better value properties for mortgage and insurance purposes.

Big data

Banks can turn the increasing volumes of real-time customer data into actionable intelligence that automatically delivers the services that customers need, and when they need them. Banking Tech notes opportunities as diverse as helping customers to work through their financial challenges, identifying fraud, and opening up new revenue streams. Banks could also monetize the big data they hold on their customers by offering retailers access to it.

Artificial intelligence (AI)

Barclays believes that artificial intelligence (AI) is the future of banking, according to a CNBC article. We have already seen rudimentary examples where users can talk to a computer system to make money transfers or access information, and one bank in Tokyo is already staffed by a helpful robot.

Cashless children

Tim Cook, chief executive of Apple, has predicted that the next generation of children won’t know what cash is (one joker proclaimed that it’s because Apple will have it all!). An alternative vision is provided by Mintel, who found that, while 39% of British people believe a cashless society is inevitable, 50% think cash is the only payment method that’s 100% secure.

The API economy

New rules such as the European Payment Services Directive (PSD2) mean banks will have to implement APIs that can provide access to payment account information to third parties – including their rivals – as long as the customer has given their explicit consent.

What next for digital banking?

So how should banks go about reshaping their branch networks? Which high-value/high-touch services should they focus on?

Expanding digital products

So far, financial institutions have focused heavily on digitizing their current accounts. Yet, there are many more products that would benefit from digitization: mortgages, private wealth, asset and vehicle finance, debt collections, and insurance, to name a few.

There’s often a reluctance to move these to digital, because financial institutions don’t understand how they can benefit from digitization, which can even be viewed as a threat. Take mortgage and motor finance as examples: Both verticals rely on brokers or dealers for a significant volume of new business. As a result, there is some reluctance to embrace solutions that could disintermediate their traditional route to market. Digital players, on the other hand, are embracing the opportunity to get closer to the customer, building deeper relationships that create loyalty for when they need their next loan.

An enriching digital experience

As branches turn away from the mass market and low-cost relationships they’ve pursued for the last few
decades, they will move to a more personal form of customer engagement focused on the high-value interactions that really matter to customers. In many ways, it will be a return to the days of the local branch manager; banking focused on relationships. Only this time, the process will go hand-in-hand with digitization:

  • The experience of opening an account will be the same in-branch and online.
  • Specialist advice can be brought in via video conferencing.
  • The provision of more self-service features will free up staff to invest more time in cementing customer relationships.
  • Telephone banking will be enhanced with mobile messaging and pre-authentication that saves customers from long-winded verification of their ID.
  • Digital tools will give customers more and more control over their finances; helping them to understand their spend and available funds in real-time.

Conclusion

This article asks how much more digital has to offer financial institutions. I would argue that financial services are only on the cusp of digital disruption. We may not be witnessing a revolution, but as shown from all the emerging trends and technologies, we’re certainly in the midst of an evolution.

However, I expect that, while we will no longer necessarily rely on human contact, we will still want it enough to keep it at the irreducible heart of the banking experience.

Few firms are born digital. Most pre-date the digital age and must face the future with the legacy of their previous operations. However uncertain the journey, there’s no doubt that those who take bold steps to transform for the better are the ones that will, if you excuse my cliche, “maintain relevance in this digital age”.


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