Financial Services: Fighting a War on all Fronts
Just as the global economy starts to return to growth, the financial services industry is facing a new string of scandals as decades of ad-hoc technology investment catches up with financial institutions (FIs). Large scale IT failures, further accusations of mis-selling and new regulatory fines highlight just some of the issues that banks are battling with. A recent Intellect report claimed that nearly 90% of technology budgets in financial services are currently spent on managing or maintaining legacy systems which leave institutions with disconnected systems, processes and data.
However, the latest challenges come at a time when the big banks are also facing increasingly empowered consumers and the emergence of new entrants who are looking to capitalise on the lack of care and attention that the old brigade has previously shown. New ‘challenger’ banks, the rise of alternative lending platforms and digital payment providers all threaten the dominance of the UK’s big banks and are bringing the industry to the brink of a transformational change.
Behaviour Economics
To date, challenger banks have often struggled to have a significant impact on the competitor landscape as they struggle to gain market appeal or scale. However, a new generation of challengers is emerging that already has large amounts of capital and a captive customer base. In the UK, supermarkets that have a financial services offering are a prime example. Take Sainsbury’s Bank, owned by the UK’s second-biggest supermarket group based on market share. It has a growth strategy that is centred round providing customers with competitive banking and insurance products that offer generous rewards through its loyalty scheme.
Sainsbury’s loyalty card programme, Nectar, generates a huge volume of data that can be used to detect behavioural patterns. The banking division is then able to use this information to adjust the margins in its financial products to influence behaviours. For example, by identifying customers who prefer short-term lending, retailers can offer consumers discounts or promotions to encourage spending on financial products with lower-interest rates.
Recent research by Sainsbury’s Bank revealed that offering offers and loyalty schemes attracts consumers to products from supermarket banks. In a survey of 4,000 consumers, 61% of consumers admit that they are attracted to using supermarket banks because they provide attractive offers and 47% say because they offer a loyalty or reward scheme.
Supermarket brands also have the added benefit of joining the financial services market with simple services so they can reduce the overheads associated with compliance and capital adequacy requirements. Adopting this approach allows supermarket banks to remain focused on delivering a consumer-centric proposition that is competitive within the market.
Payments: the New Battlefield for Control?
However, supermarkets are no longer the only challenge. In the UK and beyond, the rise of mobile consumers and development of smartphones has enabled digital superbrands to penetrate the payments space and usurp some of the capabilities traditionally reserved for big banks. For example, both PayPal and Google have developed a mobile wallet, Facebook has established Facebook Credits and Apple has the iStore mechanism. The evolution of mobile wallets that use near-field communications (NFC) for payments ‘on the go’ means that technology companies are starting to act as intermediaries which pioneer stored monetary value and effectively bypass the banks.
The introduction of digital currencies has also contributed to the beginning of a paradigm shift in modern payment systems. Whilst there are still question marks hanging over the longevity of the Bitcoin, it is placing pressure on organisations to create a system that enables frictionless money transfer. Bitcoin has grown its reputation as a peer-to-peer (P2P) digital currency that offers a secure financial system independent of traditional banks.
In addition, low-cost or non-existent transaction fees have driven the uptake of Bitcoin among online retailers who can increase sales margins by accepting it as a method of payment. So far, Overstock.com, Zynga, OKCupid, and WordPress have all signed-up to using Bitcoin. As the financial services industry approaches a stage where serious money is invested in digital currencies, it is likely that we will see brands, for example, Apple, Amazon and Google, start to create their own virtual currencies.
Redistribution of Cash
It is now only a matter of time before the industry reaches a tipping point, where the redistribution of cash liquidity materially impacts banking as we know it today. As financial services increasingly become a consumer-choice agenda, data will be the currency of providers who need to understand customer behaviours and anticipate changes in the consumption of services.
To date, legacy spaghetti systems mean that many of the UK’s big five high street banks have struggled to capture and understand data. However with the amount of available data growing rapidly – primarily due to unstructured data such as correspondence, loan facility letters, contracts and the diversity of customer interactions – prioritising investment in data management will become a strategic imperative for banks looking to maintain their dominance.
Connecting data has become a ‘must have’ for banks to adapt to continual change. The introduction of a preventative regulator means the loosely connected principles of Treating Customers Fairly (TCF), Know your Customer (KYC) and Anti-Money Laundering (AML) are being given far greater emphasis by regulators, putting new pressures on banks to connect data across siloed organisations. By becoming data-driven, big banks will be able to more effectively compete against the combination of new competition, regulation and legacy systems that are increasingly threatening their dominance.