There was once a time when the mobile smartphone market was dominated by BlackBerry handsets. In recent years BlackBerry’s sales have plummeted and it seems unlikely they will ever regain the level of dominance and market share they once enjoyed.
The company has been eclipsed by the likes of Apple, Samsung and Google’s Android who disrupted the market by providing new products, services and customer experience with their own smartphone innovations. The lesson for retail banks is that BlackBerry provides an example of an incumbent business that is now in decline after it failed to adapt to innovations in technology and changing demands and expectations from consumers. The question being asked of retail bank incumbents is whether they are facing their very own BlackBerry moment?
Incumbents versus challengers
Incumbent banks currently find themselves in a dominant position as a consequence of their size and customer base, however, such a position can quickly lead to complacency and conservatism. New challenger banks such as Monzo, Starling, Atom and Fidor have very different ideas on what the future of banking may look like and do not share many of the traditional views held by incumbents.
Challenger banks are seeking to do something different in banking and have been quick to recognise changing consumer behaviour and how technology can provide new services and customer experiences. Unlike the incumbents, they are starting from a point where their business models and relationships with customers are central. They understand that ‘millennials’ are more open to digital banking experimentation. They do not share the same level of brand loyalty as older consumers, and expect a very different service experience –measured both in time and convenience when consuming financial services. Incumbents can rely on the diverse portfolio of products and an older customer base, but technological innovation and changing consumer behaviour will ultimately force change, no one has an absolute right to their customers, this is the hardest and primary lesson of open banking change.
The move to open banking
Alongside this threat from new market entrants, legislation is changing the bank business model. Regulators in the UK and in Europe want to increase competition in the market by pushing towards an ‘open banking’ model. This is of course a fantastic opportunity and not just a threat, established institutions have the capital, customer base and the value chain smarts to work through the implications of open API enabled business, they will just have to be reasonably quick and nibble. Open banking will require banks to share data that they have historically held exclusively, with consumers and third parties, it is a repatriation of data ownership from the business to the consumer. Third parties can access this data by connecting directly to customer bank accounts via a standard Application Programming Interface (API). This access will allow third parties to build products on a bank’s infrastructure, enabling new services to be delivered and specifically tailored to the needs of different customers.
With regulation forcing banks to open up their technology to FinTech firms, startups and other financial service providers, consumers are becoming less reliant on providers of traditional financial services. The idea that one institution will manage all financial services for one customer will no longer be the most viable or the expected model. Open banking creates a new relationship between banks and customers. It requires banks to adopt a customer centric and data centric view on how they do business.
In this emerging model, data and services become valuable commodities. To extract value, banks must have the appropriate core-technology and infrastructure in place. It requires a good API governance structure that must include: standards, management policies, data access and statistics, and development processes. For banks to become digitally ready they must understand the data currently available inside their organisations and what is available externally to enhance and enrich it; data orchestration and the business context that the services represents.
The challenge for incumbents is achieving this while still renovating legacy systems and mainframes. Programming languages designed to cope with the shift in consumer behaviour do not interact well enough with older, slower back-office systems. This will ultimately hamper their ability to respond to the digital challenge.
Time to digitally transform?
The historic monopoly enjoyed by incumbents within retail banking is very much under threat. If they are to avoid their own BlackBerry moment then the pace of change to become ‘digitally ready’ needs to accelerate. There are some such as Spain’s BBVA who are leading the way in implementing digital transformation strategies. Spain’s second largest bank has explicitly stated that its top strategic priority is digital transformation. It means having the technology and business processes in place that will allow them to meet the digital challenge head on in an agile and nimble way.
Many banks have spoken about becoming digitally ready but few have embarked on the necessary steps needed. Too many incumbents continue to believe that digital transformation means creating digital products and services whilst maintaining existing business models and back end legacy systems. If retail banks are to have the future customer-focused business they need to remain relevant, they simply cannot afford any further delays. And if getting our heads around digitalisation was not enough what is apparent is that in truth a digital bank is but a milestone on the route to be a cognitive bank, more on this in my next blog, As food for thought, just contemplate digital readiness plus real time automated insight and the implications for business models and technology that stepping up to an environment centred on the customer and serviced by intelligent business process will create.