The already rapid pace of digitisation in banking has accelerated under Covid’s impact. Digital has become the default mode for most people to engage with their financial services provider and transact. In 2020, nearly three-quarters of UK banking customers regularly used digital channels1 and more than a quarter have an account with a digital-only bank2. This trend is expected to continue. Therefore, for future success, incumbent banks need to ensure that their strategy is digital at its heart.
There are three key elements of success for a bank, as indeed any other business. First, understand customer needs and how they are likely to change. Second, be creative with ideas for solutions which meet those needs better than others in the market. Third, be able to quickly execute on those ideas. The challenge for incumbent banks in today’s market is that the bar for the second and third elements has been reset significantly higher by the rise of neobanks, fintech firms, and big technology companies. They have changed customer expectations through creative solutions across the entire journey. Moreover, using Agile development approaches aided by new technology, they have launched a steady stream of new solutions and features. This has exposed the comparatively slow execution speed of incumbents who have largely played catch-up.
To win in a highly competitive market, incumbents need to improve on each of the three elements.
Incumbents should start with their core strength of understanding customers and their needs. The richness of data and the expertise built over decades is a competitive advantage. However, data needs to be turned into usable insight. Therefore banks need to create data and analytics capability which can underpin personalised engagement and tailored propositions. They should also use it to increase efficiency through improvements in internal processes, which reduce errors and failure demand. This will provide an additional competitive advantage.
"The challenge for incumbent banks in today’s market is that the bar for the second and third elements has been reset significantly higher by the rise of neobanks, fintech firms, and big technology companies"
Globally, almost all incumbents have invested significantly in data and analytics, but only a few have truly succeeded in creating value for both customers and shareholders. The key is to simultaneously solve for business value, technical capability and culture. Expensive mistakes are usually when firms focus on a subset. For example, investing in fixing data quality and infrastructure without adequate focus on use cases which generate value or business MVPs which cannot subsequently scale because underlying data issues haven’t been fixed.
Next, incumbents need to build on the understanding gleaned through data and get creative with how they engage and fulfil customer needs. Led by their experiences outside of financial services, customers expect personalisation, convenience and instant need fulfilment. A great app and end-to-end digital journeys are sine qua non. In addition, banks need to be able to connect with customers at a time and place of their choosing via APIs. Embedded finance, platform/ecosystem models such as marketplaces, are rapidly gaining traction and likely to become an important origination channel. The growth of ‘buy-now-pay-later’ as a payment and credit solution embedded within e-commerce sites demonstrates the trend. This was the fastest growing online payment method in 2020 and expected to grow at 29 percent CAGR 3
Last, incumbents need to match the agility of neobanks and fintech firms to develop and deploy propositions. This is arguably the hardest challenge given their legacy technology estate ,which constrains the pace of change and an entrenched bureaucratic culture that slows decision making. Many banks have focused on solving the former by re-platforming and moving to a cloud-based stack which allows them to fully utilise the potential of Agile and DevOps. Culture has been a harder nut to crack. While governance and control are essential in banking, given the industry’s externalities, there is a need to question many of the existing ways of doing things and recreate processes to be as efficient as possible without compromising on effectiveness. This requires a push from the top and role modelling behaviours which foster decision-making independence (within guardrails), experimentation and constant improvement. Covid has already helped force some of these changes. The task now is to embed the progress made and extend it further.
Incumbent banks have the experience, expertise and investment capability to respond strongly across all three strategic elements. This requires a coherent strategy that allows them to transition from their existing model, where digital capability is viewed as an enabler, to a model where digital capability is a differentiator.