by Benjamin Ensor, Research Director, Forrester
Traditional banks today are being disrupted by dozens of digital-first new entrants that threaten to undermine traditional firms by offering customers simpler, faster and cheaper services, such as faster loan decisions or lower-cost currency exchange. New entrants such as Europe’s Revolut, Russia’s Tinkoff Bank and New Zealand’s Xero are winning millions of customers worldwide. To survive this digital disruption, which has already ravaged the media, travel, and retail industries, established banks need to innovate and then reinvent themselves.
A host of technologies such as mobile devices, the public cloud and application programming interfaces (APIs) enable firms to deliver substantially better customer experiences, and to assemble and deliver those experiences faster and cheaper than before. The resulting innovations are creating traction for new entrants, steadily changing customer behaviour and undermining banks’ business models. However, those same new technologies can transform banks’ operations: automating manual processes and increasing workforce productivity, uncovering new insights from buried data, enabling new products, and unlocking new revenue streams.
These changes are transforming the banking industry and how it serves customers. Over the next five to 10 years, we expect that:
• Banks will seek a new purpose. One third of customers say that all banks are basically the same – and they are right. Most banks are undifferentiated, with similar propositions and the same commodity product set. To stand out and thrive, leading banks will embrace a new purpose: helping customers achieve financial outcomes. Instead of pushing products in the same old way, smart banks will reorient around supporting customers’ goals, such as owning a home, saving for college or growing a small business. Doing that well will drive banks to form new partnerships with adjacent companies so that banks can give customers more of what they want.
• Banking will become more automated. Leading banks are investing in robotic process automation and artificial intelligence (AI) in search of higher productivity and greater operational efficiency. Banks will reduce or eliminate manual errors and paper processing costs by automating back-end processes, such as anti-money-laundering, compliance monitoring, credit scoring, liquidity management, know-your-customer and regulatory reporting. Artificial intelligence will slowly transform banking over the next decade, enabling everything from instantaneous fraud detection to long-term financial planning advice.
• What bank employees do will change. With routine processing tasks being steadily automated, fewer people will be needed in transaction processing roles. As traditional roles such as branch cashiers lose relevance, banks will need to think carefully about what new skills employees need and how to retrain their existing workforces. Customer-facing employees will need to learn how to use software to augment their conversations with customers. Many banks are already struggling to attract enough candidates for roles like application development and data science.
• The banking value chain will fragment. The vertical integration that has served universal banks so well over the past few decades has become a straitjacket. Rigid organisational structures, hierarchical cultures and monolithic applications mean that many banks can’t adapt fast enough to respond to rapid changes in customer behaviour, technology, and the competitive landscape. Tightly integrated universal banks will become looser federations of business units.
• Banks will turn to partners to augment their own capabilities. Rather than trying to build everything themselves, leading banks will identify winning capabilities, invest in those, and work with partners to deliver everything else. That will drive the development of digital business ecosystems as companies partner to deliver complementary capabilities.
• Fintech start-ups will shift from being disruptors to partners. Many of the fintech start-ups that once planned to disrupt the banking industry have found that winning customers is far harder than coming up with great ideas. Many have pivoted from a direct-to-customer model to deliver their services in partnership with established banks. While a few fintech start-ups will become – or already are, for example PayPal – global consumer brands, the majority will either be acquired by banks, technology vendors or the digital giants, or fade away when their funding runs out faster than they can generate revenue.
• Digital giants, not fintech start-ups, will become the biggest threat to established banks. In their pursuit of ever more services to make their customers’ lives easier and build more profitable customer relationships, digital giants such as Alibaba, Amazon and Apple will move deeper into banking and payments. Financial services executives must learn how to coexist with and differentiate from tech giants by building their ecosystem capabilities and boosting their emotional appeal.
Under pressure from falling profit margins and continued regulatory scrutiny, bank executives are caught between the urgent need to invest in digital transformation to stay competitive and shareholders’ expectations for higher returns. The banking leaders who fail to change their firms’ culture and tackle the inflexibility of legacy systems will soon find that it is too late to avoid increasing irrelevance in customers’ lives.
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