''We are in the digital business and the changes will be as dramatic as they have been in media, music or retail. If your strategy is to be a rapid follower you’re not likely to be a success.'' – Chris Whitehead, Chief Executive, CUA, Financial Services Company.
The digital disruption hasn’t had the same impact on banks as it has on media, telecom, retail and other companies. Australian banks are progressive in digitizing their products and services and have been investing in mobile banking apps, digital advisors, social media analytics tools, location-based services, etc. to strengthen their transactional relationship with their customers. However, simply using new technologies for transactional relationships isn’t going to cut it in the future. The customers expect their banks to provide the same experience as they get from Uber, Google, and other digitally native companies, and any disruption in the experience is just not acceptable to them. For instance, when the Commonwealth Bank of Australia’s (CBA) services were disrupted last year customers took to Twitter to vent their frustration.
The banks are increasingly struggling to keep up with the pace of change when it comes to customer expectations. They are finding it difficult to work out how to move beyond using cool mobile apps, Facebook and Twitter as an alternate call center through which to connect with customers. Sensing this as an opportunity, banking competition is mushrooming all around as new competitors target different parts of the banks’ value chain. For instance:
- Established non-banking players pose an immediate threat to banks’ payment and lending business. Third-party payment providers such as PayPal and Mint Wireless are taking advantage of the country’s high smartphone penetration and are targeting the payments business of banks, which is estimated to be worth $9 billion. In fact, Mint Wireless was ranked ahead of many banks in the list of the 50 most innovative companies in Australia in 2014. Google has begun to offer payments services through Google Wallet and the company has already taken an equity stake in the peer-to-peer lender, Lending Club; now PayPal is deliberating over an imminent entry into the lending space in Australia. The competition will further intensify when ApplyPay is available (sometime in 2015) and the new real-time payments platform is launched in the country in 2016.
- Niche players aggressively target the advisory model of banks. Stockspot is disrupting the traditional wealth management advisory model of banks by providing a diversified portfolio at a fraction of the fee. On the other side, the personal finance app Pocketbook reached 100,000 users in Australia in just six months. According to Forrester Research, Pocketbook poses a real threat to the mobile innovation teams at Australian banks and has the potential to “disintermediate banks one day”. These digitally native niche players are providing bank-like services without any branch, or even a banking license, but rather by competing on the strength of their ability to make meaning from the digital footprints of customers.
- Retailers are gradually moving into the financial services space. Retailers are under such pressure to leverage enormous customer data that they have to create new revenue streams and the financial services industry appears to be a low-hanging fruit to them. Coles, Woolworths, Myer and David Jones now issue credit cards. Coles has now partnered with GE Capital to offer personal loans. I believe other customer-facing industries will also follow the trend to leverage piles of customer data that they have to offer personalized financial services.
There is no doubt that banks will still continue to dominate the financial market but their profits will be eroded in parts of the businesses as the new competition will push products and costs will continue to come down. Banks have mainly competed on price, product features, service quality, new products and branding in the past, but now a new category of competition has been added – ‘personalization’. Moreover, the new financial ecosystem is evolving; this comprises of companies across all the industries, and the future of banks will be based on their ability to play a central role in this emerging ecosystem. For instance, CBA is using augmented reality in its property app to provide real estate data to customers when they are standing in front of the house. The future of banks lies in moving beyond the transactional relationship with customers and finding the true value in the relationship by providing personalized integrated offerings across industries. Banks that start early to radically reshape themselves will be the long-term winners, rather than those who choose to “wait it out”.
As once rightly pointed out by Brian Hartzer, CEO, Westpac, “Banks should try to act like start-up companies if they are to thrive in an era of sweeping technological change. Westpac is trying to think and act like a 200-year-old start-up company.”