8. Emergence of a New Breed of Banks
As legacy banks deal with outdated core systems and processes steeped in tradition, more and more challengers are entering the competitive fray, willing to fill the gap in digital expectations of an increasingly mobile consumer. Not totally unlike the ‘free banking’ era in the U.S. during the mid-1800’s, there is a growing energy in the U.S., U.K., and globally around the establishment of new banking organizations to better serve the changing needs of today’s consumer.
The term ‘challenger bank’ is widely used as a description of a banking organization, started from the ground up, and built without relying on another banking firm for back office support. These are found less in the US, but are gaining steam in the UK, where regulations have made getting a banking license less cumbersome.
Most challenger banks focus on underserved markets, products or channels, and are not really challenging larger, established banks for market share at this time. However, challenger banks provide two important economic functions according to a KPMG report. “Firstly, they are in themselves picking up the white space left behind post-financial crisis. But perhaps more importantly, they are starting to drive incremental innovation in the wider market.”
“Challenger banks, while still in their infancy, are set up with the customer at their heart and technology at their brains. They have no legacy, no wrongs to right, but equally no customers yet. They are not to be underestimated, but 2016 will determine how much of a success they are.”
Chris Gledhill, CEO and co-founder of the UK challenger bank-to-be, Secco Bank, says, “In 2016, we will see legacy banks pairing off with challenger banks like the investment by BBVA into Atom. Similar to many fintech firms, challenger banks have vision, innovation and talent but lack money, customers and a license. Big banks have these advantages. It’s a perfect match. Just don’t be a Big Bank left partnerless when the music stops!”
According to our crowdsource panel, these smaller challenger banks may not be the only breed of competitor to deal with.
“2016 could be the year that one of the tech giants show their hand in financial services. If this occurs, this will mean profound cultural change that will make legacy firms consider new data and relationship driven business models, leveraging exciting new technologies, AI, advanced analytics and more.”
“Most of what we learned from fintech disruption in the past will become irrelevant if pure tech players, such as Google, Facebook or Apple venture into financial services with their economies of scope and ability to make platform plays at unimaginable speeds and scale.”
– Peter Vaner Auwera, Co-Founder of Innotribe
“A concern for legacy banks is the potential arrival of big ecosystems that the tech and telco companies possess. These firms are very customer-focused, with the ability to push financial services to their own customer bases.”
– Alessandro Hatami, Founder of The Pacemakers
9. Mining New Talent
A major barrier facing the banking industry in their quest to modernize their technology is the need to hire the right talent. As banking organizations compete with all industries for many of the same types of skills, banking is not viewed as the most exciting career opportunity, especially by millennials.
‘Being digital’ requires rethinking all aspects of how we conduct banking in the eyes of our employees and in the yes of the increasingly digital consumer. Changing internal processes, moving to contextual engagement and operating in real-time are all foreign concepts for most financial institutions. A major internal change will also include the increased use of data and analytics to initiate and support decision making, product development and distribution.
Attracting and retaining top digital talent that can support this internal culture shift will become a priority in 2016. According to Accenture, “Sixty-one percent of digital organizations see shortages of digital skills as a top challenge in digital transformation, and are concerned about how they can attract and retain top digital talent.”
“Currently, having somebody whose job is digital, in a bank, says a lot about the organizations in that it is something bolted on, rather than something that is fundamental, says Anne Boden, CEO of Starling Bank in the UK, ” The people who are really creating waves in data and technology are not sitting in banks. They’re sitting elsewhere.”
“It is imperative that we find experienced talent to develop disciplines like Design Thinking, Lean Start Up and proper Open Innovation, says Maria Jose Jorda Garcia, from BBVA. “These three capabilities allow a banking organization to design for the customer, to speed up value delivery, and to create those customer experiences that we are all aiming for.”
“The most impactful changes will be inside the banks and probably invisible outside for a while longer. These will be within the Executive Leadership teams and the board of directors.”
– Daryl Wilkinson, Managing Partner of Lab12 Innovation
“The vast majority of the leadership of banks don’t understand exactly how digital works and are very worried about the concept of becoming a ‘digital bank’. They have a subset of a subset of a subset of their employee base running large percentages of their business without the leadership knowing exactly what’s going on inside.”
– Alessandro Hatami, Founder of The Pacemakers
Beyond technical talent, it is believed that a diversity of talent is needed to reflect the diverse marketplace:
“Reflecting the growing prominence of women in key positions in other industries, 2016 will be the year of diversity, with women in fintech (‘see this excellent website curated by Sam Maule, from Carlisle & Gallagher on FemTech leaders) arising and taking leadership positions across start-ups and legacy organizations.”
– Claire Calmejane, Director of Innovation at Lloyds Banking Group
“Numerous studies across industries illustrate that more diverse companies outperform their counterparts. In 2016, conscious inclusion will occur at all levels and will be part of board room discussions and executive plans.”
– Lisa Kuhn Phillips, Founder of inaVision, LLC
10. Responding to Regulatory and Rate Changes
New European regulations requiring banks to offer APIs to the open market is set to have enormous impact. This is both a threat and an opportunity, with many banks not having worked out a response yet. Delivering on the opportunity will be a significant challenge, since legacy technology makes it difficult to keep pace. While there is no comparable regulation in the US, loosening the requirements for challenger banks, it will continue to be important to move in lock step with future changes.
“Regulation has the potential to create an industry dynamic that changes banking forever, states Jake Chambers, co-founder of Lab12 Innovation. “By deciding the basis of competition, from PSD2 and beyond, regulation could fuel competition, change and innovation or it could protect the stays quo. Which way it goes will be the biggest single determinant of the future of the industry in the UK.”
“Regulators are increasingly focused on fintech upstarts. 2016 will be the year it is decided where and how to tighten oversight vs. create a sandbox to protect innovation. They will do both – the question is, who will get which treatment?
– Jennifer Tescher, President and CEO of The Center for Financial Services Innovation
“In the US (where checks are still widely used), regulation around overdrafts is expected mid-year. If regulators do move forward with the kinds of limits floated recently, banks will be busy adding fees, which could be an avenue for non-traditional banks to stand out.”
– Alex Jimenez, Digital Banking and Payments Strategist
“Rising interest rates, which might not become significant until 2017 or later, will challenge young bankers who have never even heard of passbooks. How do you market and compete on interest rates? And how will the digital banks put pressure on banks with expensive legacy technology and legacy branches?”
– Tom Groenfeldt, writer at Forbes
“With the Fed increasing its base interest rate, the rest of the world is on notice that all our costs will soon go up. We have had it so good for so long, but change is imminent and that will affect our behavior more than any other industry trend in 2016.”
– Alex Jimenez, Digital Banking and Payments Strategist
“As rates rise, deposit teams will realize that broad brush ‘front book/back book’ promotional pricing techniques are too blunt an instrument, and will increasingly test market, segment and customer-level targeting of promotional pricing. This will allow banks to be competitive with higher rate competitors and selectively grow deposits from rate sensitive customers without re-pricing the entire portfolio, keeping interest rate ‘betas’ reasonable as rates rise.”
“2016 will more dramatically underscore the difference between the winners and the losers, as the ebbing tide of interest rates and the economy will expose those who are not investing in new ideas and new technology to improve efficiencies and customer experiences, states JP Nicols, President and COO of Innosect.
Jim Bruene, Editor and Founder of Finovate, added, “2016 will be a year of execution, as a number of big trends begun in the 2008 recession move mainstream (mobile, P2P lending, robo-advising, biometrics, etc.). I also expect the large financial brands to roll-out formidable solutions, often powered by the very upstarts bent on disrupting them.”
Finally, Penny Crosman, Editor in Chief for Bank Technology News may sum up the upcoming year the best, “Banks will step up their game technology-wise; they’ll continue to partner with fintech startups and they’ll begin rolling out useful mobile wallet apps that compete with Apple Pay, Samsung Pay and Android Pay. They will also start to pilot and deploy blockchain-style software for payments, trade finance and securities settlement. Finally, they will also find a mutually agreeable way of sharing customer data with data aggregators and personal financial management providers, to deliver a better customer experience.”
A Note of Thanks
We would like to take this opportunity to thank the close to 100 member crowdsource panel that assisted in the development of this expansive annual report. The insight shared was extraordinary and the continued support of this effort is greatly appreciated. There is no place that we know where more diverse and in-depth insight is available. In combination with the research done by the team at the Digital Banking Report, we believe we have the best source for what will most likely happen in banking in 2016.
We would also welcome any comments or discussion around 2016 trends believed to be missed or shortchanged. Nobody’s perfect, and it would be great to receive even more insights for the readers of this article.
Finally, we would like to thank the sponsors of this year’s research. Kony, Inc.