Retail Financial Services in 2017 and what to Expect from the Year Ahead
Interview with Karine Coutinho, Deputy Managing Director & Head of Content, Efma
Karine Coutinho, Efma’s deputy managing director & head of content, outlines the disruptive forces impacting those operating in the retail financial services industry and suggests strategies for a successful future
What are the biggest disruptors in retail banking today?
One of the biggest disrupters is unquestionably the revised Directive on Payment Services (PSD2). This set of wide-ranging regulations is expected to bring sweeping changes to retail financial services in Europe. It will impact daily banking and drive the shift towards a more open banking landscape as banks will be forced to allow third parties to access customer account information through more open and standardised application programming interfaces (APIs) and allow payments to be initiated directly from the bank account. The challenges resulting from the PSD2 directive are compounded for traditional banks, who have to compete with neobanks such as Banco Original in Brazil or Solaris Bank in Germany who have already launched their API platforms.
How are banks leveraging disruptive technologies?
For the vast majority of today’s banks, the biggest goal is to complete their digital transformation. This will not only enable them to reduce costs, but also allow them to compete with online banks.
In our recent Innovation in Retail Banking report, conducted in collaboration with EdgeVerve-Infosys, we found that disruptive technologies are helping to accelerate the digitisation of banking and are spurring changes to banking business models. We are only just starting to see the impact of these and expect that the changes will accelerate over the next 2 to 3 year.
We are already seeing a large number of start-ups and established banks launch digital only banks which can operate off a much lower cost base and provide a very different customer experience.
Indeed, our report found that approximately 20 percent of banks are launching or considering launching a digital only bank. A small minority (approximately 5 percent) are acquiring or considering acquiring a digital only banking business.
What role do fintechs play in this disruptive environment?
Fintechs are developing many brilliant ideas. It is often difficult for banks to do the same internally because they lack the necessary agility. Therefore, it is easier for them to collaborate with fintechs in order to innovate and to be disruptive.
Our Innovation in Retail Banking report found that 41 percent of banks are working with start-ups as suppliers and 32 percent of banks are making investments in start-ups.
Meanwhile, 27 percent are running accelerators or incubators, internally or externally.
How do new technologies have the power to disrupt and change future banking business models?
New technologies can bring new revenue streams, as is the case for big data. ZestFinance is a case in point here, which is turning shopping data into credit data, creating credit histories for over half a billion people in China who were without one.
Meanwhile, disruptive solutions like AI and robotics are changing the customer experience. Take RBS’s AI system Luvo, for example. Developed with IBM Watson, it can understand questions and then filter through huge amounts of information in a split second before responding with the answer.
Luvo is unique in that a ‘human’ like personality has been created for it, making it easier for employees to interact with. Like humans, Luvo has to be trained when dealing with new subject matter, but crucially, it learns from its mistakes and its answers become more accurate over time.
APIs are allowing banks to bring together a complete offer of financial services provided by several providers. In Germany, two banks have set out to provide services to other innovative companies encouraging them to build services on top of the bank’s open architecture: SolarisBank and Sutor Bank. Established banks like Capital One and BBVA are taking a lead in developing an approach for working with Open APIs and third party developers
Finally, new blockchain solutions are creating better operational efficiency for banks.
Investment in blockchain start-ups increased from zero in 2012 to US$496 million in 2015, according to CB Insights, and remained at a high level at the beginning of 2016.
While 21 percent of the banks feel blockchain/distributed ledger as a disruptive technology will have an impact in the next two years, over 40 percent feel it will have an impact in 3-4 years.
How are different countries leveraging these disruptive solutions?
There is a striking difference here with banks from low income countries not expecting a high impact from blockchain/distributed ledger technologies, and generally expecting the impact of other disruptive technologies to be lower than banks from high or middle income countries. The banks from high and middle income countries are relatively similar in their expectations.
What advice do you offer retail banks today in order to secure a successful future?
Banks cannot take a wait-and-see attitude. From our point of view, banks which choose to focus on compliance and sit this out, run the risk of being relegated to becoming ‘dumb pipes’, disintermediated by third parties and other banks – where their offering is commoditised, their brand becomes less relevant, and they compete merely on price and operational excellence.
Financial services firms should learn lessons from companies in other industries such as travel, where the competitive landscape shifted, and firms without an open strategy found themselves left behind, reliant on demand from new digital aggregators and comparison engines.
However, for those banks that will move beyond compliance and act promptly – both organisationally and in terms of technology – we believe there’s a unique opportunity to capture additional market share, fuel sustainable growth and remain at the centre of the primary customer-bank relationship. A more open and innovative ecosystem – aggregation platforms, data & analytics, marketplaces, mash-up services and comparison tools – could enable banks to stay relevant to their customers and develop new revenue streams, as banking becomes more seamlessly embedded in the daily life of the customer.