Digital Banking 30

Long time waiting

Long time talking about digital banking, long time waiting for banks to become digital, …long time not seeing something new.

But banking is a ‘boring’ day-to-day business (if not, be worried), so changes may take long time.

Some weeks ago, Fico published a new survey on millennials behaviors - Fico survey on millennials. Millennials have lower loyalty than other age segments. This is just one of this generation characteristics, not good or devil – at least, from a business point of view. I want to believe that this business ‘unloyalty’ comes from the fact that they have grown up used to be just ‘one click away’ from switching providers. When analyzing this unloyalty regarding their everyday banking account (yes, one can switch from one bank to another), it is higher than in other age segments. No surprises. However, the underlying reasons are not ‘digital’ as one may have considered (the new bank has cooler apps, allows P2P payments based on blockchain, the wallet is easy to use and very popular, uses big data in such way that the risk profile is always accurate and updated and the commercial offers are unbeatable, …), but three ‘typical suspects’ in retail banking:

1. price - let’s be realistic, most banks offer the same products and services regardless marketing, so if they are commodities, price matters
2. payments as expected – customers want the certainty that payments are done when due and hassle freely; it is about managing expectations
3. branch and ATM network – I dare considering that the latter is especially relevant, as far as we still need cash and we need it available without fees

Is this the reason it is taking the banks such long time to digitalize themselves? Is it that customers do not really care how digital their banks are, but how properly banks do what they are expected to?

And despite the millennials unloyalty, it looks like things are not so different among banks, since switching is not common place. UK authorities have relentlessly pursued to ease account switching and therefore competition, but results are far from satisfactory. 

On the 9^th of August, the UK government published its report on of competition in the markets for current accounts for personal customers and for banking services to small businesses - Making banks work harder for you. 

Some ideas to be pointed out:

• Mobile banking is now widely adopted and growing fast. New types of payment services, lending and financial management services are now available from providers which are not banks. 
• Banks will only invest in new products or services or reduce their prices and improve service quality, if they expect to win business as a result, or fear losing business if they do not. 
• Personal and business current account relationships are open-ended and do not have regular trigger points (like the annual renewal of insurance policies, for example) when customers might be prompted to ask themselves whether they could be getting a better deal elsewhere on their current account. 
• Only 3% of personal customers and 4% of business customers switch to a different bank in any year. 
• We found that older banks have access to cheaper retail deposits from their existing customers which they can use in their lending businesses. 
• Banks which are viewed by investors as ‘too big to fail’ are seen as lower risk and therefore benefit from lower wholesale funding costs compared to smaller banks. 
• Older banks with a track record in residential mortgage lending have to hold smaller levels of shareholder funds to back up such lending compared to newer banks and some smaller banks. These differences are larger for loans whose value is much less than the value of the property against which the lending is secured. Some smaller and newer banks are therefore at a competitive disadvantage in the residential mortgage market as they have to hold more capital against the loan. 
• Even when new entrants and smaller banks introduce competitive products it takes a long time to build customer numbers 
• … 
• We are requiring banks to allow their customers to share their own bank data securely with third parties using an open banking standard. 
• Without our intervention, the process of developing open APIs cannot be guaranteed and could take a long time, with the effect of denying customers the early benefits of these new services. We are therefore also imposing a challenging, but realistic, timeframe on banks for this process. The least sensitive information – for example about banks’ prices, terms and conditions and branch location – will be made available by the end of March 2017. We expect that all aspects of an open banking standard will be up and running in early 2018. 
• Open APIs will give customers control over what data is shared and with whom. 
• Open APIs can transform the financial services sector.

We need time to see how things evolve, but this open bank API economy will be a new step toward the digitalization of banks. This digitalization is seen as a means for increasing competition, hence customer service.

Digitalizing a bank goes beyond developing an app, having a fancy web, implementing a big data solution (to keep on doing business as usual) or creating an innovation lab with some ex Googlers and the like. Most banks have already done it. And long time ago. Digitalizing the bank may mean to keep on doing banking but in a different way. APIs may give the opportunity to decouple the “shop” from the “factory”; API ready banks will have the opportunity to leverage on their channels to market products and services that have been created by them or third parties, API ready banks will have the opportunity to create products and services to be marketed by them or third parties. The same way business model for Facebook relies on content created by its users, business model for Amazon or eBay relies on products created by others or business model for Apple relies on content (media, music, apps, …) created by others. APIs may enable banks to be part of an ecosystem.

And finally, a couple things totally unrelated:

• Too much talking about the underbanked. What about the overbanked? …The rise of the overbanked
• The dangers of trying to become digital very fast …Fake boarding pass app gets hacker fancy airline lounge
• Brutal …People still use pathetic passwords. You know you have to change your LinkedIn password

Have a great week