You ain’t seen nuthin’ yet

I hosted a dinner the other night, talking about how technology has changed banking.  We had a great conversation and I wrote down 26 points from the 14 contributions made in the opening round robin.  These points are summarised below and may be summed up by one word: change. Things are changing fast and, as one person stated (bearing in mind Chatham House Rule), if you think things are changing a lot today, you ain’t seen nothing yet! 

How Technology Is Changing Financial Services

Speed of change is the key.  Things used to be slow, but now it’s fast.  The pace of change and ability to keep up is a fundamental challenge.  If you think it’s fast now, it’s going to look slow when you look back in years to come, as it’s just going to get faster.  We are just at the start of these changes and there is still massive change to come, as the internet of things connected to apps through the mobile web becomes standard and ubiquitous. 

The things you need to do in the bank are to manage expectations internally and externally, in terms of the ability to keep up, as technology is moving far faster than banks or any other industry can keep up.  Nevertheless, we do need to create agile systems architectures in order to be able to keep up.  Regulatory Compliance is also a key factor as you keep up.

In fact, a core question in the future is: do we actually need banks?  We need banking, but do we need banks?  As we see banks making billions in profits and walk around Canary Wharf or Wall Street and see these massive offices, it begs the question:  do we need these massive structures?  This is going to be a big ask over the next five to ten years, and the new entrants may well cause these empires to crack and fall.  After all, where are the iTunes and Uber of banking?

For example, start-ups are seeing opportunities to tackle the banks by targeting the easiest areas, where the banks are weak.  These are the areas that have the oldest systems, such as credit processes, and the new entrants begin with no history and target these areas with simplification processes.  In addition to this, most banks are not ready to work with or engage with start-ups, giving them even greater opportunity to disrupt as a result. 

Even the role that banks think is safest – risk management – is being disrupted by technology.  Banks historically have been the key to risk management between taking deposits and making loans, but much of this is moving across to alternative providers like Zopa and Funding Circle.  Therefore, it is pretty surprising that some banks, like RBS and Santander, are actively promoting customers to migrate to these start-ups.  After all, why would you as an incumbent bank tell me that you cannot give me a loan, because I do not meet your strict credit criteria, and then tell me to go and talk to Funding Circle who will enable me to get that loan?  Where do you think my loyalty will lie next time I need help?

Equally, take the focus upon user experience (UX).  UX is improving fast and is becoming a competitive differentiation factor, as customers want digital and omnichannel experiences, and the bank has to be able to deliver those both to the retail and the corporate client.  Conversely, the fintech start-ups hear phrases like digital and omnichannel and just smile … these terms are not relevant to them.  These are the terms that banks use to think about change and evolution;  start-ups are just there as digital natives, and don’t even think of terms like channel.  In fact, the fintech start-ups would call themselves technology firms that provide finance, rather than banks who think of themselves as financial institutions that use technology.

Nevertheless, when we think of the biggest threats –GAFA (Google, Apple, Facebook, Amazon) – the banks don’t see these as threats.  After all, what impact on brand would it have if Google or Apple repossessed your home for underpayment of your mortgage?  These brands won’t go there as it’s too heavy a lift to replace core banking infrastructures.  However, there are other opportunities to disintermediate banks.  This means that GAFA will focus upon the customer relationship and present themselves as brand wallets, rather than entering into core products and services in finance.   This will take the relationship away from the banking industry and is a major challenge for the future, as it leaves the industry with the infrastructure but with no relationship.

In addition, GAFA are unlikely to target core bank services as these firms are already legacy incumbents.  Take Google.  Google is really slow to move due to their legacy structures.  That is why any significant changes to core search services takes months.  A fintech start-up can get things done in a few days, rather than months.  For example, one firm launched a new financial product within 30 days of forming the idea.  Google and the banks cannot match that speed of innovation.

The discussion finished with a key question: if everything is changing around the financial system but the system itself remains at the core, isn’t the stuff that’s changing just froth?  We’ll let y’all think about that one a while …