It’s time for banks to embrace disruption

ndgit series: Experts talk about banking disruption

By Ruedi Maeder, editor-in-chief of the financial news platform MoneyToday.ch

Not all, but many, traditional banks are very busy with themselves. As a result, they’re often too distracted to confront external disruptors. It also means there’s little time or consideration for their own disruptive evolution. There are just too many other things to tackle first.

Of course, traditional banks and financial institutions are also actively involved in digitization. However, it’s often less about the urgently needed new mindsets that could secure the future, and more about the technicalities that optimize operations. Adopting a tick box ‘ABC’ style approach may be characteristic of digital transformation, but it’s far removed from the strategic ‘freestyling’ that can bring success when facing disruptive forces.

Why go freestyle?

Freestyling is not limited to digital processes. Banks that question existing business models, are making a good start. Questioning what future customers expect, and how to respond with their own core strengths, can lead to new concepts and business models that strengthen a bank’s position and help it successfully break into the future.

However, this type of journey is not a straight line, with a beginning and an end. It’s a constant marathon and an ongoing process. It helps, therefore, to provide enough resources so that the ‘crew’ doesn’t run out of steam and that changes don’t fail due to lack of investment and low budgets.

Why should banks disrupt themselves?

In short, “because if not, others will”. In more detail – in the next ten years, things will not continue as they have in the past ten or twenty years. Why? Because there are some upheavals changing banking forever and they have been going on for some time.

Big techs like Apple, Google, Amazon, Alipay and moving in on the market with concrete offers and financial services on the way – and they’re getting even more active in order to secure a bigger piece of the pie.

A few years ago, young entrepreneurs began to implement their ideas on a small scale. After a surprisingly short time, they’ve become unicorns with banking licenses, ‘billion-dollar’ valuations, and staggering ‘10’000+ customers day’ growth. All while operating between very cheap and free services and expanding these quickly and constantly.  Think N26, Revolut, TransferWise and many more.

Almost every day, studies show banks’ problems are not getting smaller, they’re getting bigger. For example, Accenture predicts that transaction-based banks could lose £280 bn by 2025.

Whether or not Libra becomes as a world currency is still in the stars. The fact is that the development of crypto and digital currencies has started, and continues to gain momentum. FinTech crypto banks and crypto exchanges are affecting the core business of banks in a number of areas with tokenization and digital assets.

All these examples are just the tip of the iceberg, the list of disruptive development is never-ending.

But banks have a hard time too

Of course, banks face challenges, but that doesn’t interest customers. Whether or not banks have suffered from exorbitantly widened regulatory requirements since the last financial crisis and have to invest heavily in compliance and processes is not something that’s going to bother retail or wealth customers.

They are also not sympathetic about banks having to open their restricted IT and monolithic core banking and legacy systems under PSD2 and share their biggest treasure, the customer interface.  Nor do customers care that big banks, like supertankers, have trouble manoeuvring quickly or that traditional corporate culture can’t keep up with rapidly changing circumstances.

It’s understandable that banks due to lower interest rates and eroding revenues are increasing fees. However, they can’t expect customers to simply accept this and compensate them for their rising costs. Particularly when they can choose from a variety of zero-fee offers from financial disruptors.

If fast-growing fintechs and big techs can offer new financial services at very low fees or often for free, banks will come under additional pressure to do the same. The much-hyped loyalty customers feel for traditional banks may be short-lived, as it gives way to a desire to try new services and benefit from low fees.

Loyalty today is a fleeting thing. Once the grace period is over, many customers will proactively seek new benefits elsewhere. Being complacent and ignoring the threat of churn represents a Sword of Damocles for banks and can be extremely dangerous.

Those that are reluctant to innovate and instead focus on adversity, obstacles, hurdles, and cast a suspicious or passive eye on new developments face ruin in the longer term. The market won’t wait for them.  The rest of the supplier world is very active, merciless, and so are bank customers, and especially new-generation consumers (Gen Y and Gen X).

What options do traditional banks have?

Across all industries, disruption is both a current development and an experienced fact. And it will increase even more – especially in the financial industry. Looking at current market behaviour, there are some clear response patterns emerging:

Scenario 1: Shock, ignorance and decline
Many traditional brand leaders are watching the developments with a mixture of ignorance and arrogance, defiantly insisting on upholding analogous traditions. Convinced that things went well in the past, they believe it will always be so. Their previous success, their scale and achievements are seen as a shield that will avert future disaster and dangers. Their course set, the market shifts, they begin to lose in size and appeal and, in the worst case, go down sooner or later.

Scenario 2: Wrong conclusions and half-hearted reaction
Companies facing disruption by others begin watching and waiting. They want to be quite sure that any threats are serious before they act. Meanwhile, their disruptors are steadily gaining in size and encroaching on more of their terrain. There then follows knee-jerk reactions and rapidly initialized projects which end up being more about digital optimization and ‘detail cosmetics’, lacking the strength to pull the wheel around and change strategic direction. It’s difficult for these companies, with their defensive strategy to win a long-running battle for market share that is steadily being eaten by others.

Scenario 3: Acting like, and becoming, a disrupter
More agile factions within disrupted companies wonder why they too cannot disrupt and champion change within their own market. Quickly and without detours, they evolve digital strategies and develop new business models which focus on customers and their new expectations. Learning from the disruptors, the objectors, the customers and the market, the company starts to redefine itself, going through a painful process which ultimately leads to new growth opportunities – not just within its own industry, but within new connected ecosystems that lie beyond.

Being your own disruptor is the best insurance for the future

The path that traditional banks and financial institutions choose will to some extent relate to their individual opportunities, temperaments, and the progressiveness of their senior management.

However, it’s clear that as competitive environments become more difficult, the chances and opportunities also become much greater. The prerequisite for taking advantage of these lies in sustainable strategies and new business models that keep banks ahead of the curve. Exploiting the opportunities of open banking and platforms and being able to understand customers and excite them with new services at a reasonable cost, will help banks seize the opportunities.

Those who not only fight the initiatives of fintechs and big techs, but manage to beat them with their own strong solutions, will secure their market position and may even expand. By cooperating with ‘new attackers’ they may even be able to accelerate and boost their success.

At the end of the day, one thing is clear, a protectionist mentality no longer cuts it – not even for banks. Creative businesses that move forward with new business models, need no protection, their action is the best insurance for the future. To sum up, those who passively let the world change around them will face stormy times ahead. Those who actively embrace change and stay on the ball, all of the time, will be best placed to succeed.

Blogger Shortbio

Ruedi Maeder is the editor-in-chief of the Swiss-based financial news platform MoneyToday.ch. As a specialist in digitization and fintech, he regularly publishes and lectures on the topics and developments that keep the world of finance moving.

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