What happens when the financial industry turns upside down?
The financial services industry is changing. It’s no longer the slow and steady industry that it once was, and its customers are no longer fully dependent on the ability and willingness of the big banks to help them. In this revamped era, the relationship between bank and customer has been turned completely upside down: it is now the customer in control and calling the shots!
In part this is due to new players emerging in payments, crowd funding, investing and other services traditionally only delivered by banks. This demonstrates, to some extent, how technology can be a great driver of fairness and equality, a concept explored by my colleague, Carlos Van Prabucki’s blog here.
Only banks that can answer the fast-paced and personal demands of their new generation of customers will continue to thrive. In fact, their very survival is at risk as regulators are actually driving industry innovation with regulations like PSD2 and Open Banking empowering customers to make their own choices, based on what service provider (bank or otherwise) offers the best services: lowest prices and, perhaps most importantly, optimal personal relevance. This means that banks need to be able to quickly adopt new psychological and technological developments in order to stay relevant. Artificial Intelligence can help personify what banks offer to their clients, and how they approach them. Robotic Process Automation can reduce overhead costs in the back-end and improve processing time for greater client satisfaction. Quantum can reduce the impact of financial risk mitigation, both freeing up budgets for other purposes, like continuous innovation of customer experience.
Managing the switch
Now that Fintechs (and other startups like Insuretech, Pensiontech, Regtech and crowdfunding platforms) are raising the bar for customer services in the financial industry, banks feel the necessity to change their pace in the area of customer services and solutions as well. Of course ‘change’ and ‘innovation’ make little sense if you are caring for a stable and proven infrastructure that simply needs to work. That is not an environment where you want to take risks.
This means that we now see a strong division emerge between the agile customer-centric services and the steady and trusted processing infrastructure emerge.
So how can banks manage this new disintermediation with their clients?
Bringing innovation in
To get agility and great service quickly, banks are more and more often using partners in FinTech, InsureTech and crowdfunding platforms to deliver their service layer for them. This offers a speedy response to customer service needs and allows them to “buy in” the best in technology design and new ideas.
Banks, in short, are evolving from monolithic institutes with huge control over their customers into agile, open banking platforms, vying for the favor of the customers by attracting the best partners to support rapid innovation.
In order to adapt to these changes, it is key to adopt a high level of digitalization within their services. But this offers vital dilemmas for banks to face:
- Is our current operating model (including employees) able to support such an agile and partner heavy way of working? What would a potential new Digital Operating Model look like?
- How can we make sure that our platform is best suited to the needs of customers and gain favor over the others offered by competitors?
- How can we weed through the ever-expanding field of start-ups and scale-ups and select the smartest and most innovative partners to include in our platform?
- How will this impact the underlying infrastructure? How do we keep a more open banking industry safe and protected? Or can we improve security with new technology as well?
All these questions contain a world of details and potential solutions, that can be explored in later publications. But let’s quickly scratch the surface of the last question.
As the ever changing services layer moves further away from the stable infrastructure, the limitations of this 50+ year old design become more and more apparent. SEPA (payments standardization) and Instant Payments (end-to-end processing of transactions) go a long way towards improving this logistical pipeline in finance, but in the end they are nothing but patches on an already sewn-up blanket. They do the trick now, but can such a centric solution, focused on a single trust agent in the middle continue to support such a rapidly developing industry? Can it even properly support a more mature sharing economy or circular economy, that work more on principles of micro transactions and future processing than simple straight through processing of transactions?
All these factors will mean that infrastructure requirements will continue to rise for fraud prevention, privacy protection, (cyber) security, transaction speed and product improvement. On top of this, with a growing number of actors, one can wonder if banks should continue to process transactions themselves or is this best left to a few back-bone specialists who can reduce maintenance costs? And if all this isn’t enough, we also see emerging entrants to compete with the stable banking infrastructure. For instance, how can distributed processing (DLT or Blockchain) be of impact?
A new world in banking
In no other industry do we see so clearly the impact of emerging technologies and how they are changing business models and the world economy for good. In our recent thought leadership paper, Journey 2022, we talk about the digital dilemmas business will face in the coming years and that the needs of people and society will take a central position – this is being played out beautifully in the financial industry right now.
Banks and insurers alike face fundamental questions and need to take decisions that will reshape their organizations for good. One thing is certain though: with the pace of change the industry is following, doing nothing is not an option.