This year, Davos threatens to be more relevant than it has in years. Luminaries from around the world will descend on Switzerland to debate the world economy, but it’s the underlying theme of this year’s event that interests me. "Mastering the fourth industrial revolution" is a challenge that companies of all shapes and sizes can relate to.
Technology has reshaped our lives and, as a result, commerce. For some this has sparked new avenues of opportunities, while others are left looking like luddites. Nowhere is this more obvious than in financial services. Outwitted and outpaced by developments such as Apple Pay and PayPal, banks are in danger of fading into the background. The rapid rise of contactless payments, development of partnerships (e.g. you can now book an Uber through Facebook), means that paying for things has become part of our everyday – we don’t even think about it. The risk is, that in turn, we’re also not thinking about who powers that transaction, namely our bank.
So, what can they do?
The issue banks face is that they are too big and too regulated to innovate from within. To overcome this, they’ve started to befriend FinTechs. The increasingly friendly rhetoric is born out of a realisation that as we hurtle into the Internet of Things, the PayPal approach becomes ever more appealing for consumers, and the more traditional services banks provide are under threat of cannibalisation.
If banks are going to survive in the age of convergence and 5G, they need a wider pool of data. The data that powers transactions needs to be available to all. Banks are not islands and they need to build relationships with FinTechs, retailers and loyalty reward schemes, at the very least, in order to respond to changing consumer requirements. As it stands, the risk is that social interfaces will emerge as the new banking platforms.
Banking needs to become about consumer lifestyles, the conduit for how people live their lives. If they wanted to, banks could be the powerhouses behind new products and services. They have the data and can provide a hyper tailored service for customers at an individual level. This data is capable of powering more than a new service model, but also more revenue streams, because in turn banks will be able to offer their partners insights into their customer segments and how their brand performs against competitors in certain regions.
Instead, banks hug their data tight. They’d rather ‘know what they know’ and not give away their gold. In a competitive landscape this initially makes sense, but the rules of the game have changed. Banks are no longer in control – technology has overtaken them. If they want to get back in the game, they’re going to need to break some of their own ‘rules’.
A personal relationship
For years, driven by cost efficiency, banks have kept their clients at arm’s lengths. This was fine at first, but as a result banks don’t have a personal relationship with their customers. And this is a serious problem because they are now seen as out of touch. Even millennials value the in-bank experience. Challenger banks have recognised too that they can’t challenge the establishment in the online world only – many such as Atom and Starling are in talks with institutions such as the Post Office in order to secure a high street presence. This is in direct contrast to the bigger banks, which McKinsey predicts could close a further 2,400 branches over the next five years. Whilst bigger banks are retreating from the high street space, the next generation recognise that apps are fine when everything is good in your financial world, but the first sign of trouble and you want the assurance of human interaction, not an automated machine or a web Q&A.
For many banks who have begun the process of either consolidating their high street branches or closing them altogether, this regression into the era of personalised banking is something of a conundrum. I believe that in the future, we will see the rise of ‘Automatic Banks’, which are high street branches that feature cubbyholes where you can go and talk to a person about your banking questions. The consultant will have your details and, having used sophisticated algorithms, pulled trends from your banking data in order to offer solutions or advice. In fact, we may begin to see a model develop where the Post Office or local supermarket will become a hub for multiple bank brands.
This might sound desperately impersonal, but this misses the point because as consumers we no longer care about the bank but the experience. To go back to my original point, people want to be engaged as individuals based on their lifestyle. If banks are going to be left standing in five years’ time, they’ve got to become the hub via which people manage their lives. That means building partnerships and ecosystems, collaborating, innovating and, most importantly, sharing data.
Whilst social networks might be an integral part of our lives, what they don’t have is an overview of our spending, saving and lending history combined with the bigger picture that banking data provides at a large scale. Banks have a massive opportunity, but they need to be careful that they aren’t beaten to the punch. Ultimately if banks can’t position themselves at the centre of an ecosystem that understands personal preference, they will die.