The Future of the Digital Bank

header image

New technologies have shown to be a driving force behind new business cases. Most of the time, however, banks are not really pioneers regarding these kind of changes. New providers keep pushing into traditional business areas and use innovative technologies to generate additional value for the customers. Particularly the past year needs to be viewed as a wake-up-call for the banking sector to push its efforts in the digital sector. How can banks react to challenges posed by new competitors like Apple Pay? Taking a look at other industries reveals a lot of opportunities apart from the risks. To use these opportunities, banks need to adjust their strategies smart and consistently.

Banks need to expand their business cases by a useful digitalization strategy. Common customer business does barely offer impulses for such advancements. Banks customers' demands are rather conservative and most of them request free add-on services like free credit cards, mobile banking or personal finance management. Hitherto, customers are little interested in new digital services like Facebook-banking, P2P payments, and services that are independent from location. When banks decide to improve their digital profile, they often limit their initiatives to improve, accelerate and reduce costs of existing services. However, in the long run it would be better to meet the customers' requirements better, faster and perhaps cheaper – following this order. Digital instruments like apps, digital forms, or interest calculators cannot offer the customers any real value in their everyday lives, nor do they offer sufficient possibilities for differentiation for the bank. The influence of innovation and the adaptation to new technologies can be observed in the travel and retail industry for quite some time. Music, books, and the journalistic branch were the first fields to experience the change about ten years ago. Customers got used to buying things online quickly. At the same time, providers improved their supply chains. Clothing industry followed shortly after – and a similar change is looming in the finance sector and it will dramatically change the game in the oncoming years. It is again technology that poses the foundation for innovation that offer the customers new opportunities. Normally, this doesn't take place in on single big step, but happens in a long term process. This process can be prompted by obvious changes in the market, for example like the foray of Apple and Google into the formerly Nokia-dominated business of mobile phone production, or with smaller innovations that begin at the less profitable customer segments. One example for this are budget airlines that address primarily young customers.

Banks lose their role as intermediary

Banks are in danger of losing their function as a classic middleman. This process is analogous to earlier evolutions like in the travel business, where travel offices have been substituted by the internet. Respective developments become apparent in the finance industry. For example, american company CommonBond connects graduates and undergraduates to broker student loans with low interest rates. Zopa also brokers loans between their users. The web-based social network Tradeshift on the other hand enables registered companies to balance invoices based on real-time financial reviews. Another innovative provider, Currency Fair, offers money transfer at considerably lower costs as traditional banks. In all of these cases, technology helps lowering transaction costs and make credit information available at any time. At the moment, these processes only account for a fracture of total sales in the customer business. But these developments are known to have the potential to accelerate tremendously from an adaptation rate of around fifteen percent. Banks can profit from these developments as well. For example, they can interconnect two customer segments like investors and growing companies. But in order to make these steps, banks need to reconsider their credit risk policies and adjust their IT system accordingly.

Customers like it the casual way

There is another trend that can be observed. Prepaid cards are primarily popular in the secular business or with iTunes cards in supermarkets. In the anglo-american areas, there are already billions of dollars in these systems without generating interest and without customers questioning this state. There are about 4 billion dollars stuck in the Starbucks Reward Cards alone, which is a significant share of Starbucks' annual sales of 15 billion dollars. This shows that interest rates are not overly important to customers, as opposed to easy availability. In times of extremely low interest rates, the popularity of bank accounts can be assumed to decrease further. As the trend in the retail business moves further towards digitalization, there will be more and more companies introducing new systems with payment features. Another advantage: this doesn't only contribute to tying in customers, but also to gathering valuable information on the individual buying behavior. Banks can also profit from from this. They can set up programs for loyal customers themselves and connect distributors run up against their limits, as they do not allow for sufficient differentiation anymore. When reward and discount system become a standard, companies need to shift their focus toward new aspects. Other companies can serve as inspiration for the finance sector in this respect. The trend in consumer goods goes from discounts toward a claim for better performance and service to justify higher charges. This is true for premium anti-aging lotions as well as for razors with an ever-increasing number of built-in blades. The travel business is more and more concerned with customer experience. British Airways is working on realizing a completely hassle-free travel from the customers' homes to their hotels. Do achieve this, they create a digital platform that all partners can access to retrieve information and which enables working together more closely. Coca Cola works similarly to simplify the development of marketing programs by its agencies. In September 2014 the company announced a new web portal for apps that provides developers with easy access to important information and data. Also Unilever Foundry serves as an example – a digital collaborative platform with the goal to accelerate innovation und offer the highest possible value to the customer.
These developments show: Many innovation start silently and stay under the radar while cutting the ground from under the feet of established companies. At the same time they hold chances. On the one hand, existing activities are supposed to be optimized, like for example mobile access to bank accounts. On the other hand, regarding the new competition, long-term changes need to be foregrounded. The goal is to fulfill the customers' wishes better, faster and cheaper, which requires a widespread digital transformation. On the basis of the respective infrastructure, supply and demand can be paired more effectively and new, promising business fields can be exploited. As Apple Pay has shown, these can in fact be part of established business areas. But banks need to be open for change and not only reconsider their old business models but shift their IT budget to RTB and CTB – which includes costs for the maintenance of the status quo (Rund The Bank, RTB) and costs for further developing and adjusting the systems (Change The Bank, CTB). A consistent omni-channel marketing and integrated product and IT teams that focus on innovative products are also necessary.

The digital future ahead

Digital transformation is closely connected with mobile applications, social networks and powerful devices. This generates publicity but doesn't suffice from a strategic point of view. Back office IT processes need to be placed on a powerful platform to enable information to flow seamlessly. Additionally, banks should develop modern products and services that distinguishes them from other competitors. Up to now, most digital trends are driven by the big IT providers and aspiring start-ups. As long as banks refrain from actively shaping the digital change, they will be degraded to mere backend providers due to altered customer behavior. With a good strategy, on the other hand, banks have all the prerequisites to profit from digital trends and to exploit new business areas in the future.