In their review of the banking industry for 2015, McKinsey & Company suggested that 60% of retail bank profits could be wiped out by fintech (financial technology) companies inside the next decade. Similar research by Accenture predicts that at least a third of retail banking activity will be lost by 2020 – that’s not far into the future to see a third of retail banking customers going to brand new competitors.
This dramatic change to the retail banking environment is a highly visible form of digital transformation, or industry disruption. In most cases, discussion around disruption seems quite academic – it lacks urgency. But when you look at the decline of the banking industry, it is clear that disruption is the only way to describe what is happening right now.
But we are not witnessing the destruction of retail banking as an industry or service; rather, the distribution of banking activities will move to new market entrants rather than remaining with the traditional service providers. According to recent Harvard Business Review research, 90% of senior executives across multiple industries believe that their industry is being reinvented by digital business models that are disrupting the existing ways that business takes place.
In a recent interview with Computer Weekly, the Fujitsu senior executive vice-president for Europe, the Middle East, India, Africa, and the Americas, Duncan Tait, said that it is possible to foresee and manage digital disruption. He said: “All industries will be unrecognisable to their current form as technology and digital transforms industries and connects them together over the next few years,” and Tait said speed and partnerships are the way to the top in this environment. “In this new world, only the boldest organisations will prosper, new areas of competition are opening up here and fast movers are gaining the advantage,” he added.
How are fintechs winning over retail banking customers?
So, whether you are in banking or not, industrial disruption is something that most executives are trying to predict – when it will happen and what it means for their business. To get an idea why these disruptions are taking place, let’s consider why fintechs are being so successful in banking:
- No baggage: this allows them to offer cheaper prices: every retail bank has an enormous branch networks with staff, processes, and infrastructure that cost an enormous amount to maintain. Fintechs can bypass all of this and operate with no legacy systems or processes. Even though there are now only a third of the retail banking branches in the UK that there were in the late 1980s, this is still a considerable burden.
- Their service can be local, or global, or in-between: most fintechs use the app store platform on Apple and Android to distribute their service. This gives them an immediate global distribution platform with an easy way to update users to the latest system. In some cases, regulations will restrict which markets they can operate in, but the distribution platforms are entirely global.
- Services are designed around the customer: if you had to design a system offering loans, would you look to the slow, bureaucratic procedures of your local retail bank or just tear up the rules and design it from scratch, making the service as straightforward as possible for retail banking customers? Of course you would design processes to be customer-centric – so the fintechs have an enormous advantage because they offer easy, hassle-free services.
In short, the services are easier for retail banking customers to use, work better, and are cheaper. The only thing the retail banks can rely on in the short term is their brand, reputation, and the fact that millions of customers are unlikely to move to new services overnight.
Further down the line we will see how the industry evolves. Retail banks might undertake some radical changes when they see how hard they need to fight for the business, or they might just buy some of the most innovative fintechs and bundle the offering into their own service.
The real point is that when competitors start creating disruption and building new services around how retail banking customers behave, it’s time to start examining your business and figure out how you can make positive change.
What changes do you think retail banks need to make to be more customer-centric? Leave a comment below, or get in touch on LinkedIn, and let me know.