Fintechs and challenger banks may be all the rage now (as they quickly reap the rewards of their tech-savvy strategies), but the larger — and greater existential — threats to the traditional banking model have been walking around for years. The industry generally refers to these firms as “big techs,” but R “Ray” Wang has a different term for them: digital giants.
Wang is a chief analyst and founder of Constellation Research, a tech research and advisory firm based out of Silicon Valley. He’s the author of best-selling digital transformation book, “Disrupting Digital Business,” and his latest book, “Everybody Wants to Rule the World,” just came out in July 2021. A non-resident Senior Fellow at The Atlantic Council’s GeoTech Center, Wang has spent almost 20 years studying and speaking publicly about digital disruption.
When Wang refers to digital giants, he’s talking about the Facebooks, Amazons, Apples and Googles of the world — all of which have mastered the personalization factor in customer experience and can navigate circles around most financial institutions when it comes to “knowing the consumer.”
So, if these digital giants were to break into banking (further), would traditional banks be prepared to compete? Some banks and credit unions are managing to find the path, taking the advice of marketing experts who advise data aggregation is the key to unlocking the loyal customer. Yet, others are struggling to compete with the superior engagement skills these digital giants have perfected.
Wang offered his insights in a podcast conversation with Jim Marous, Co-Publisher of The Financial Brand, CEO of the Digital Banking Report about what were — and are — the drivers of change for the financial industry rolling out of the Covid-19 pandemic, where traditional institutions still have the upper hand and what will ultimately determine the winner of banking customers. Below are highlights from the interview.
( Listen To The Full Podcast: Winning in a World of Digital Giants )
What are the biggest changes for banking that came out of the pandemic?
R ‘Ray’ Wang: On the business side, the biggest change is that we suddenly discovered what digital should be. Some people put digital channels up and they’re like, “Great. I’ve got a mobile app, but what else does it do?” And so, we stretched the limits of digital from a couple areas — one from the channel side, the second one was really from a business model perspective — thinking about what you can do — and then the monetization aspect came into play.
It’s important to really understand where you can actually put those three forces to work.
The companies that ‘got’ analytics that understood automation and understood artificial intelligence are the ones that are going to come out of this pandemic the strongest. What I mean by ‘got’ analytics is, we used to start the day just doing our normal thing. We had a task list, and then we ended the week with a report that said, “Hey, here’s how we all did.” And that was retrospective.
The companies that got analytics — that understood automation and understood AI — are the ones that are going to come out of this pandemic strongest.
— R ‘Ray’ Wang, Principal Analyst and Founder, Constellation Research
What happens now is, we start the day with analytics. We carry out the rest of the day with analytics and reporting, and we end the day with analytics and metrics. And the collection of that is being automated. It’s not just what [the data] we enter, it’s all the things that are happening around us.
That information is building these big data-driven digital networks. These are the platforms that are powering the future businesses.
( Read More: The Top 11 Fintech Disruptors of 2021 )
How do institutions catch up when change is happening faster than ever?
Wang: It’s a great question. The gaps between winners and losers is widening, and you’re seeing it across the board. The winners are either bulking up or are becoming more specialized.
The losers are trying to do everything in between. They’re in the middle and there’s really no room for the middle anymore.
The challenge is really ‘How do I fit in this shifting market where I’m either going after the value play or I’m providing something that has brand value?’ That’s the first gap between winners and losers. The second one is, if you own the customer data and the customer relationship, and if you are not giving it up, then you actually have a shot.
Where Winners Excel:
It’s not enough anymore to be mediocre in all your financial offerings. Instead, traditional institutions should focus on how to bulk up or to really specialize in what they’re best at.
But, if you’ve actually arbitraged it out — because you don’t want to invest in delivery, you don’t want to invest in a front-end mobile app and you think you can just skate by being a supplier — then you better be really good because the larger those partners get, the more likely they’re going to build out those capabilities.
Should innovation mainly be focused on the ability to drive speed and simplicity?
Wang: Speed and simplicity is one aspect. But, I think the other important one is really re-establishing and re-enforcing that customer experience and that customer relationship. You need both in banking.
For example, I bank at a large bank, one of the top three banks. I hate that bank (I really do) and the only thing saving them is the banker that’s there. And that’s not even the private banker. I hate the private banker because she’s always trying to upsell me on something I don’t need.
There’s just a really darn good banker there. And she has ten of my accounts and about 50% of my portfolio. And every time they try to put someone else in her place, I tell the management team, “I will move all my accounts.”
But I’m also at a certain other bank because they’re open from 9 to 6 o’clock and the other banks are closed early (they close at 2:00 p.m. on a Saturday) and I need a bank that’s open to 4 p.m.
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What is most likely to derail digital transformation efforts at financial institutions?
Wang: A lot of it comes back to having (or not having) a sense of empathy — building a design-thinking mindset, trying to put yourself in your stakeholders’ shoes.
You’re trying to minimize that process for the stakeholder and also make it super-efficient and repeatable inside the organization so it can be offered as a digital service. And that ‘servitization’ becomes very important. And the understanding of how that servitization is used, which is the analytics, is really the differentiator.
Do you see platformification as a model for the future?
Wang: I definitely do. The large networks with the digital giants are all pushing into healthcare and financial services. And part of the reason that they’re doing that is because these large networks are easy cross sells, using data as an advantage, and using their ability to build digital channels to monetize what’s going on.
What will be the biggest differentiator between winners and losers in the future?
Wang: Winners have a few factors. The first one is they understand data supremacy and how, and why, it’s so important to get not just high-quality data — but the most amount of high-quality data. And those include insights like location or context areas in terms of someone’s process or the time or the weather or what they’re doing.
And then another factor is that winning companies have a long-term mindset. They’re okay losing tons of money so long they’re gaining market share, or gaining daily active users or whatever the important metric is.
You saw that i with Robinhood — free trades, free commissions — but the data is being sold to other institutions to understand signal intelligence.
What are other traits of digital giant winners?
Wang: The first one is you really have to reinvent your organization. What is that mission and purpose? How do we actually deliver a product? And what kind of teams do we want? What marketplaces do we want to go after? Is there any kind of financial engineering that has to happen that will make this a different approach?
The second piece is, you want to build the biggest network you can find — whether it’s 50 million users, 100 million devices — or use someone else’s network by partnering with them, or actually going after that network.
And that’s where owning the customer relationship is important because if you don’t own the customer relationship, it doesn’t matter what other assets you have. That customer relationship may have first been built because you could deliver something better than someone else, but you don’t have to own the infrastructure to do that delivery, although it may make it easier. But you definitely have to own that customer relationship.
The Essence of Winning:
You don’t have to own the infrastructure to succeed in a data-driven world. But you definitely have to own that customer relationship.
And then we’re competing for data supremacy. How do we actually go out and capture that right level of data? These data-driven digital network platforms are what’s driving it. And we got to figure out how to turn that data into money.
And that’s where the digital monetization comes into place that we talked about earlier — ads search, goods, services, subscriptions, and memberships. And then we have to figure out how to create joint venture models where it makes sense. Partnerships are really important to go build these out.
And then of course, that long-term growth mindset is important. It’s okay to lose millions, hundreds of millions, over the next five years if you’re growing at the rate of 40%, if you’re gaining market share.