While looking back on the last 10 years of the financial sector’s journey, a lot of things have changed, giving the impression that a much longer timespan has passed. The traditional financial sector had banks as the major, if not unique, player. Of course, there were other financial organizations, but they always functioned as a support or as an extension of the services provided by the banks, never as competitors.
The aftermath of the last financial crisis saw the banks licking their wounds, trying to regain the customers’ trust on one hand, but also trying to improve a financial model that, while ‘highly regulated’, proved to have a lot of flaws. A set of new regulations and procedures that would avoid what happened in 2008 was put in place, transforming the already “rigid” banking environment into an even more intransigent one.
The Technology Revolution
Since the last decade, we have witnessed a technological boom that has influenced all areas of life, from the professional to the personal ones, affecting transportation, healthcare, retail commerce and even our social lives. Finance and financial services was not an exception.
What was sci-fi 10 years ago has become reality, and technology has changed the way we perceive life and interact with each other. While historically, the banking industry was reasonably good at following and integrating the technology changes in order to better serve consumers, the industry failed to keep the pace after the financial crisis as it was busy dealing with the new roles, new regulation requirements, and trying to find a solution for these changes.
At the same time that innovation was becoming a very distant priority for the banks, technology started to be a game changer in the everyday business. Leveraging cutting-edge technology and exploiting a regulation that was quite permissive, fintech firms began to offer consumers a totally new way to deal with financial solutions – a way that was far easier, simpler and less time consuming than traditional banks offered.
Enter New Banking Competitors
In a relatively few years, a banking ecosystem related exclusively to legacy banks welcomed a new typology of financial enterprises – sometimes garage start-ups, sometimes big non-traditional players – with a focus that included coverage of specific portions of the financial market, non-conventional services, enhanced flexibility and a strong challenge to the regulations.
When companies like Apple, Facebook, Amazon, Airbnb, WhatsApp and WeChat faced the market, they created an important distinction between what was offered previously and what customers knew they could get, especially from the user experience and persuasion prospective. And this is the same type of gap that fintech firms started to address … introducing a different way of dealing with the financial activities.
By bringing an innovative use of technology into the design and delivery of the financial services, fintech firms transformed, and are still transforming, the banking role as previously known. Things like artificial intelligence, peer-to-peer lending, blockchain, crowdfunding and robot advisors are just a few examples of the innovation provided by fintech firms. It should not be considered just a simple game of technology integration, however, as what the financial technology firms brought to the table was introducing a unique customer experience, especially in the most profitable business areas typically offered by traditional banks.
A Focus on the Consumer Experience
Looking back, it can be stated that ten years ago was the moment when the change or the transformation of the financial world begun. With all the above-mentioned factors, a new way of providing financial services was born. It was not all about traditional banking. It was about how non-traditional financial firms provided small, specialized services belonging to a new banking ecosystem. The differentiation was the focus on exceptional service and care towards the customer needs. And, it was in this moment that something never considered before became important: the experience the customer had while researching, selecting, purchasing and using financial services.
These multiple changes in environment, technology, new players and new processes marked the beginning of a long, ongoing transformation process. It caused an evolution of the financial world from a static, rigid model with the bank at the center, to an active, flexible ecosystem focused on the clients’ needs. The leveraging of technology – from the use of AI to predict a customer behavior to the chatbot/ virtual assistant introduction to assist customers – became a differentiator in a consumer’s every day actions.
By putting the client at the center of all activities, both banks and new players realized that what the customer would look for was not an on-line application, but an engagement that offers solutions that takes care of their needs and provides a fulfilling experience at the same time. While it seemed that these banks and fintech firms were competitors, it was clear that there was little room for ‘war’ among banks and new players. They had to work together toward a better consumer experience.
A Move Towards ‘Coopetition’
Both traditional banks and fintech firms lacked something that could have been provided by the other one: banks lacked the flexibility and the ‘out-of-the-box’ thinking that the new players had, while fintech firms lacked the structure, scale and data the banks had.
Again, cooperation between traditional banks and fintech firms proved to be a viable option, and it seems to be a fact that is acknowledged today: the majority of financial enterprises identify the key to the success is the cooperation with non-traditional players. This partnership can provide the consumer with the product or service they need at the right time and in the proper way … a real competitive advantage. In this partnership, banks have a strong ally, the huge amount of data about their customers.
What is important is that in order to be a winner in this environment, the transformation must be emphasized, not only in terms of products and services, but also in terms of processes and internal culture. Besides the giant steps that the technology enables, the people working in the financial services industry, especially in the banks, must be able to foresee, accept and drive the change that our society is undergoing.
A Reduction in Physical Engagement
Currently, the United Kingdom, United States and most of other countries are seeing the lowest number of bank branches in decades. In the UK, you have to go back 60 years ago to find a lower number of bank branches than today. Last year saw the use of bank branches decrease by 9,8% in a single year — the biggest reduction ever.
In the US, banks like BoA, Chase and Wells have cut more than 15% of their branches in just the last 4 years, bringing their branch levels back to that of the early 1980s. Existing branches are being reduced in size and any new branches are to fill in geographic gaps.
The future is about putting the bank in the lives of consumers with minimal or no friction in everyday life. Any kind of physical representation of the products will disappear, with banks and credit unions moving to offer financial service in a contextualized environment.
A New Definition of ‘Banker’
When bringing to life this huge transformation project, the biggest challenge is not the difficulty of implementing and developing cutting-edge technologies or channels, but the challenge of engaging entire organizations in this transformation process. The future banker will have different skills, attitudes and compensation structure compared to the traditional model.
In the coming decade, technology will revolutionize the banking work force. There will be fewer bankers in traditional roles, while the roles of those who remain will be fundamentally upended. As a result, transforming talent will be just as important to rebuilding a viable, successful banking franchise as transforming products and processes.
Banks must find a way to employ teams that are always on the cutting edge of the innovation – not only to improve the business performance, but also to manage the risk. Banks need to recognize the skill sets required in the future, considering that it will be radically different from those of today. Employee capabilities must evolve as rapidly as the technology itself. For this purpose, a new culture, strongly related to the digitalization and transformation that is occurring will be needed.
The key to success in the future will be finding a balance between working in a strongly regulated organization and having a flexible start-up mentality. Looking at the current picture, in order to survive, a bank should not only battle against other peer banks, but it should fight (or cooperate) with fintech firms that are becoming empires and garage start-ups that are not based in garages anymore.
The change in financial services is happening faster than ever before … but will never happen this slowly again. Preparation and proactivity are the best defense against irrelevance.