Traditional banking models need to transform. They must evolve to cater to the changing expectations of customers and to keep pace with growing competition from digital disruptors.
The environment in which banks operate today has changed dramatically compared to just a few years ago. In 2014, for example, 85% of the UK’s banking market was served by just five big banks, and entry for new competitors was prohibitively difficult.
Today, many of those previous barriers to entry have fallen, enabled by the cloud and other digital technologies, as well as by changes in the regulatory landscape aimed at encouraging innovation and delivering more choice for banking customers.
While technology is critical to transformation, it’s not the whole story. Successful transformation also requires banks to change their cultures, mindsets and skills. And they must keep customer wants and needs at the heart of everything they do.
People have long had complaints about traditional banking. Poor customer service. Inconvenient hours and locations. Time-consuming transactions and delays on payments and clearing. Limited online and mobile capabilities, and more. Customer dissatisfaction was further exacerbated by the 2008 financial crisis and by issues such as high-profile data breaches and service outages.
Meanwhile, many customers – especially those accustomed to the speed and ease of apps and online shopping – have been looking for a better digital banking experience. Unlike previous generations that were often reluctant to switch, these customers feel none of the loyalty or lock-in to big high-street names. They want banks that offer services that meet modern needs.
Today’s customers, whether individuals thinking about their current accounts, or businesses reviewing their banking services, want more. More choices and options, including greater personalisation, faster solutions, self-service, and the ability to conduct transactions anytime and anywhere.
The COVID-19 pandemic has accelerated those trends, forcing organisations to find new ways to deliver services virtually and digitally.
“COVID-19 has not only forced businesses to look to more digital, flexible ways of working for themselves – it has fast-tracked the prevailing customer trends they need to respond to, such as the move to digital-first services. Even those customers who, until earlier this year, would have chosen to bank in person, in branch, have increasingly moved online during the pandemic out of necessity. In turn, that has shown customers what is possible. But it has also demonstrated the effectiveness, relevance and usability of the digital services currently on offer.”
For banks, this has brought increased pressure to update and digitise their products and services. And that’s something that challenger banks have had a head start on.
The desire for a different kind of retail banking is reflected by the latest customer ratings from the consumer association Which? These showed that two of the top three highest-ranked organisations were challenger banks. One of those was Starling Bank, which launched as a digitally native mobile retail bank in May 2017. Founder and CEO Anne Boden says her mission was simple: to “change banking forever”.
A veteran of the traditional banking industry, Boden had set out to build a new kind of bank from the ground up. She saw a future built on digital and mobile technologies, with fast – even real-time – services that met people’s banking needs and provided them with a variety of new capabilities: insights into spending habits, management tools for spending and saving, instant notifications about transactions, card control tools and more.
Shortly after it began offering services for consumers, Starling Bank set out to change business banking as well. To support this objective, it first aimed to secure one of the top grants from the UK’s Capability and Innovation Fund (CIF), which would give it a platform to build a revolutionary suite of business banking products. With the top CIF awards typically reserved for banks that already offered such services, rather than for market newcomers, it made the challenge even greater.
This required a deep understanding of what small- and medium-sized business customers wanted and needed – and how that contrasted with what established banking services provided. Discussions through focus groups and with small business customers across the UK helped identify real-world unmet banking needs.
Working from this knowledge, Starling Bank began developing ideas for services to fill these gaps.
Ultimately, it came up with a suite of 52 new products and services. Designed specifically to meet the needs of sole traders, micro businesses and smaller SMEs, these products included instant invoicing, VAT management, flexible deposit accounts and multi-user card services. The goal was to bring about real change in the business banking market, which was also a key criterion for the CIF grants.
Starling Bank launched its new offering in March 2018. In February 2019, it was awarded a £100m CIF grant – from the highest level of funding available. A brand-new digital disruptor had essentially come out of nowhere to win.
While Starling Bank was able to successfully launch a new service from scratch to meet customer expectations, what about existing, traditional banks? Many have tried and failed to launch offerings that compete with digital-native competitors. The reason? They didn’t recognise that transformation involves more than simply bolting modern technology onto existing services and products.
To meet customer expectations, retain market position and compete against digital challengers, banks must adopt new models with financial technology (FinTech) at their heart. PwC’s Global Fintech Report (2019) found that only 48% of financial services organisations have done this – and just 37% had integrated emerging technologies into their products and services.
Digital transformation also requires banks to modernise their back-end operations through the right mix of technology and workforce reskilling.
In other words, banks need wholesale change – not just in technology. They need to rethink how they work, lead and operate across every part of the business. Doing this isn’t easy. But it’s necessary to get the most out of new technologies.
The main objective behind every transformation programme should be delivering an improved customer experience. This requires banks to – as Starling Bank did successfully – thoroughly research the markets they serve, better understand what products and services their customers want, and look for opportunities to fill gaps with innovative new offerings.
They must also work to build customer trust, both in the quality of services they provide and in their underlying systems. This includes building strong cyber security and privacy protections into everything they do, as well as being transparent about how they make decisions, set pricing, enforce customer policies and use customer data.
All kinds of organisations have seen the need to accelerate their digitalisation programmes in 2020. Legacy banks have tended to lag in these efforts, but they can no longer ignore the imperatives for change.
Banks must embrace new and emerging technologies that will enable them to do this: mobile technologies, the cloud, automation, the Internet of Things and artificial intelligence. Such innovations will enable them to provide personalised services with a human touch, informed by better data insights. And they will enable banks to provide these services cost-effectively and at scale, by helping employees work more efficiently and provide higher-value services, while automation handles repetitive and lower-value tasks.
Customers today expect banks to serve them just as quickly, efficiently and conveniently as the world’s top technology businesses and eCommerce sites do. The banking organisations that do this best are the ones most likely to succeed.
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