Managing Your Cash Flow

Banks need to adopt a challenger mindset in order to survive

9 min read

14 June 2016

Even in the wake of the economic crises it is no exaggeration to say the financial services industry now faces its greatest period of uncertainty.

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One of the sector’s most significant disruptions will take place in the EU when the second set of PSD (Payment Service Directive) regulations come in to effect in early 2018.

One of the strands of PSD2, known as Access to Accounts (or XS2A) will allow companies operating within the financial services industry to demand banks provide a software “toolkit” for accessing basic account information of retail banking customers. These application programming interfaces (APIs) will provide the building blocks on which a number of tech firms (even Facebook or Google) can create platforms that provide fully-featured and truly modern financial services.

For example, imagine if customers could see all their accounts on one dashboard and instantly make transfers between them. The customer wouldn’t need to have any direct interaction with the bank and would instead be seeing the brand of a third party, completely changing the dynamic between the bank and the customer. However, established banks and financial services firms should be wary of perceiving new fintech players as big threats. Instead, bosses should ask themselves how they ended up in this position and how to get out of it. To do this, they need to take a leaf from the book of the challengers.

It’s the outdated strategies, procedures and IT systems within established banks that are the real problem. Banks have been unwilling to put the customer first for too long –look at the opening hours of your local branch if you need evidence of that. Simply put, big banks have paid too little attention to the process of attracting and retaining customers, instead relying on a steady stream of new customers who are prepared to put up with inconvenient services because they have little choice.

Take just one element of a traditional retail bank’s offering as an example – transferring money from one country to another. Startups such as Transferwise compete directly with banks, offering lower fees and fairer exchange rates. If disruption and innovation continues outside of large financial institutions, such firms will lose revenue, customers and relevance. However, there are ways banks can hang on to customers.

Customer expectations are changing. A new breed of digital services have taken over in many areas of our lives, meaning that we have become used to greater convenience and immediacy. But with banking, customers are still forced to put up with slow, outdated, analogue processes. Banks need to put the customer at the front of everything being done in terms of how services are built. Only by anticipating customer behaviour and providing products that they need and will want to use can the banks continue to stay relevant. This is what fintech startups are doing – banks must follow.

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And looking back into recent history, companies that once dominated sectors such as Nokia, Blackberry and Kodak, failed to accept the changes in the market and the inflexibility of the business models being used. No bank is too big to fail.

Read on to find out why banks should be challenging the old business model.

Putting a focus on innovation and experimentation is a good start – but banks could even go so far as to hire people with a strong background of innovation from the fintech world, or even acquire one such startup. As long as it doesn’t get stymied by internal bureaucracy and red tape, these innovators can help banks come up with a completely new process.

There are some good examples of banks that are introducing new business models successfully – look at BBVA’s adoption of the Innovation Center, Barclays in the UK partnering with a tech accelerator and mBank in Poland being considered as one of the most exciting innovators in banking, allowing customers to get approvals on loans within 30-seconds via iPhones.

Consumers can watch a TV programme on their iPad as they travel home from work on the train, then as soon as they get into their home they can pick up the same show at the exact point they stopped watching on their Smart TV. Banking services need to be just as seamless in order to satisfy the 21st Century customer.

Banks need to have one unified platform delivered through multiple channels in such a way that the customer always knows exactly what is going on and has complete confidence that the bank does too. Achieving this isn’t simple, but meeting consumers’ increasingly high expectations of what a good experience entails is vital. If customers can perform an action such as making a balance transfer in-branch, then they need to be able to do this on the phone, online and on their mobile device. While legacy IT systems make this an expensive and complex challenge for established banks it is something banks should be addressing as a matter of priority.

Most high street banks have introduced a simple mobile app for smartphones, but the functionality is in many cases very basic. As part of an effective omni-channel strategy as outlined above, there is a strong argument for making mobile the first step towards this goal. If there is one common theme that unites the plethora of fintech services that have sprung up in recent years then it is a strong mobile app. An easy-to-use, personal and functional app can really help to set a bank apart from its competitors and will keep existing customers happy while attracting new ones too. However, it is important to keep the omni-channel goal in focus – mobile is one tool for customers to do their banking, but not the only one.

Banks need to move quickly to take what could admittedly be expensive decisions to ensure that services remain fit for purpose in the 21st Century. If not then bosses could find themselves pushed out by fintech companies that are nimble, innovative and daring enough to make a play to steal customers – which will prove to be even more expensive. And in order to make sure banks don’t become a page in the history books, bosses need to start thinking in the same way as startups creators – by putting the customer first.

Jouk Pleiter is CEO of Backbase.

If you think about the way banks and customers typically interact, the terms are very much dictated by the bank. However this is set to change, as customers become more choosy about the banks they use based on which can offer them the best experience.