The focus of Customers is no longer primarily on products and services. Instead they look for enriched experiences combining convenience, personalisation and relevance. Within these experiences they demand that businesses demonstrate an understanding of them and their requirements, that facilitates effective and accurate decision-making via the channel of their choice. Customers don’t want to wait! They demand instant fulfillment and if that is not possible they expect transparency of where their purchase, order or application is in the process. These are experiences customers have now become accustomed to courtesy of tech giants such as Amazon and Netflix.
Looking at my own interactions with Amazon and Netflix I can easily confirm the view that these still relatively new market players are the benchmark challengers of the status quo – focused on evolving and enriching the customer experience. Recommendations given to me by Netflix on what I may like to watch based on what I have watched before has saved me hours of ‘flicking’ time and in most cases, impressively, it’s on the money!
Similarly, the 2-hour delivery option offered by Amazon Prime, has been a real lifesaver in emergencies, providing me a view of exactly where the order is from Warehouse, to on-route, to door. The customer expectation bar has well and truly been raised to the point where traditional banks need to act or risk becoming irrelevant.
Whilst this might all sound a little dramatic, a closer look at the traditional banks’ closed, product centric business models versus the new market entrants use of technology driven solutions focused on the overall customer experience, quickly unveils that this disruption will have permanent effects. The question that needs to be answered is what are these new entrants doing differently to drive their success and how does that differ to what traditional banks are now in response trying to achieve through their Digital Transformation programmes?
Firstly, I don’t believe these Digital Transformation programmes run by incumbents have been set up correctly (read my last article – “What does Being Digital actually mean?” – to view some of the reasons why success is limited). But more importantly the old (incumbents) and the new have two completely different perspectives and business models. Incumbents primarily benchmark themselves against their competitors and hence are very reactive, always responding, trying to keep up. New entrants use cross industry benchmarks and ask questions such as, who are the best in providing customer experience across industries – placing the benchmark higher than that of an incumbent. They have non-banking thinking and use technology as the fuel to drive their agenda. But the biggest advantage they have is their mindset – specifically the concept of viewing the customer experience as a commodity in its own right! It is this focus on the customer experience that is the vehicle to their success. It is their ability to build a unique – customised relationship that promotes loyalty and all the benefits customer loyalty brings with it that has disrupted the old landscape permanently.
However, whilst I feel traditional banks have benchmarked themselves incorrectly by limiting their comparisons to their known direct competition, I also find them relying heavily on heritage, brand, existing customer base and deep complicity of regulation to keep their advantage. The latter is now also starting to evolve and this will force a new tide of change. Changes in regulation coupled with the continual digital evolution are the perfect combination to expedite and drive the open banking movement that has, until now, failed to deliver the promise of competitive banking. This also paves the way to commoditising the value chain and maybe finally delivering a more enriched customer experience.
The opportunity of second Payments Services Directive (PSD2) to a future API driven Open banking era
While these new entrants continue to flirt with enriched customer experiences coupled with competing products and services to seduce the customer, traditional banks have managed to stave off the competition by firmly keeping hold of the crown jewels – the current customer database – out of their reach. However, with EU paving the way forwards with regulation to promote open banking, this is about to change!
The account information and payments services domain sees the first such regulatory driven change for the banks by way of the second open services directive – PSD2. PSD2 requires banks operating in the region to make customer and account information as well as payments services securely available to third parties with customer consent. Although Open banking is something that has been talked about for a while, PSD2 aims to make it a realistic proposition empowering customers to choose.
As such this will be a catalyst for an API driven Open banking model being mandated to provide more autonomy and control to the customer as well as stimulating competition. The European Unions PSD2 directive will have a global reach and be a means of reducing barriers of entry for new market entrants; this will generate healthy competition and positively disrupt the industry, facilitating digital transformation within banks as well as commoditising customer experience rather than solely products and services.
The threat to Banks
New entrants may still not be able to compete with banks with respect to providing depth in the amount and types of product and services incumbent banks have the luxury of providing coupled with access to capital. However the new digitally driven entrants are using the enriched Customer experience as a commodity in its own right, to compete with the incumbents – breaking up the value chain and taking some of the value chain links. Incumbents have woken up to the threat of a new open banking era and the emerging business models that it may be forced to adopt. One such model could see incumbents merely provide a product or service whilst performing back-office processing duties. This will place the customer relationship at risk to the customer experience providing entity or aggregator, even if the experience centres around the incumbent’s product or service. A customer’s current bank will no longer be a one-stop shop or first port of call, as these aggregators make it easy for customers to select products and services from a wide array of banks and providers without fear of complexity in managing these.
We have already seen the stranglehold banks had on payments services loosened with entrants such as Paypal and their acquisition by eBay promoting the service to settle payments for its auctions. This promotion by eBay to its user base as the default and preferred means of settlement allowed it to gain prominence over competing third parties such as BidPay (Western Union) and Google Checkout. Thanks to tech giants such as eBay and Amazon, consumer confidence in using third party payments services has grown.
The digital era has brought us a number of new and enhanced customer experiences such as mobile banking. Mobile banking has far out paced the adoption of Internet banking before it, due to on-demand availability and convenience. However the customer experience with these bank driven applications are limited and transactional allowing the customer to check balances, make payments and transfers etc. Compare this with the customer experiences provided by Netflix and Amazon.
Today the consumer is more confident to utilise third party providers such as Financial Technology companies (FinTechs). Coupled with regulation such as PSD2 we will continue to see new type of exciting digital offerings and services being offered by third party aggregators such as Smart Personal Financial Management solutions who consolidate customer information from multi-banks to provide an intuitive and smarter facility that helps customers manage their portfolios with personalised recommendations based on individual behaviours. Such third party aggregators enable customers to shop around for services and not be seduced by existing banking relationships. Traditional banks should fear the loss of loyalty historically based on number of products the customer previously had with the bank and hence determining stickiness. As long as they can have a service which brings it all together with a smart and consistent experience which is seamless, it will matter less who is providing the banking facility. The customer relationship will shift away from the banks as a new rage of customer experience driven competitors muscle in.
Catalyst for transformation
The traditional banking model will need to be re-hashed from aspiring for multi-product exclusivity with the customer, to a more open platform creating and making available new and exciting customer experiences that can aggregate data from multiple external sources.
The disruptors have served the wake-up call to traditional banks. They now need to assess how they best align to the new digital ecosystem centred around customer experience and empowerment. The result will be the redefining of customer loyalty as they seek to widen their search for products and services seduced by the simplification of managing the vast array of multi-provider propositions by way of API driven aggregators. It is these aggregators who are pushing to commoditise the customer experience by placing themselves as intermediaries in the value chain and providing the customer experience which interfaces with the incumbents and their customers.
Rather than a threat, banks should seek to use the new disruptor developments to partner or even compete directly with them on offering superior experiences. This will enable them to hold onto their existing relationship whilst competing to shift in the way banks design solutions.
Traditional banks are not technology light weights. With their financial platforms available why would banks not look at the feasibility of widening products and services outside the financial domain to compete directly with their prospective competitors? This would be progressive. However, this is something that requires a change in business models and culture.
Ecosystem and Platform driven cultural change in approach
Banks today see their products and service offerings as commodities and revenue generators. As long as they continue to see the world like this, they will continue to see other banks and providers of competing products and services as competition. This is analogous of walking down a narrow pathway where you can see someone walking towards you, a visible threat.
Products and services can no longer be the determinant commodity and banks cannot rely on KPIs such as number of customer and number of products per customer etc to determine the loyalty of the customer. Customer experience is the key to both maintaining and acquiring customer relationships – you will see I don’t use customers but customer relationships and hence the health of the customer relationship becomes an important KPI.
The pathway has widened significantly to create a more open playing field. Those whom already have healthy customer relationships are primed to take advantage of the opportunity that comes with open banking. Tech giants such as Amazon and Apple who already have a digital back bone and have customers entrenched with the type of customer experiences that enable them to have healthy customer relationships are already gearing up to disrupt this market. Incumbents need to change their legacy ethos and strategies towards providing value driven experiences to even hold on to their existing relationships.
Regulations such as PSD2 which we see driving the open banking landscape should be seen as an opportunity to play an evolving role as service providers for other banks as well as aggregators for their customers, providing unified and holistic experiences that consolidate information and services which can be used together for the betterment of the customer. First mover advantage will be key to retain one’s existing customer base whilst acquiring new customers seduced by a new type of holistic experience.
If incumbents take this view and the threat of being back office operators, it can meet the threat head on to hang on to the customer relationship. The same incumbents would change their business models and aspire to be a platform aggregator, providing an open platform allowing partners to push their products and services along side their own offerings. In my opinion the prospect of building a powerful partner ecosystem, bringing together customers, suppliers (who can also be customers), as well as your competitors would place any bank in a truly powerful position.
Amazon is a true use case for banks, (as well as a real emerging threat). The tech giant who started as ecommerce book seller now turned platform connecting suppliers and customers. Suppliers can be both their customers and competitors, however by creating an open platform and owning the customer experience, it also owns the customer relationship. Can you remember the last time you ordered anything on Amazon whether it was directly with Amazon or with one of its many marketplace suppliers? Most likely not – however you will remember that you got it on Amazon. Genius! Traditional banks need to take big strides in accepting that business models will need to change drastically and seeing their competition as partners can help facilitate superior unified customer experiences which will help strengthen existing as well as acquiring new relationships.
The traditional arrogant stance by banks in owning the customer relationship has meant they continue to take a reactive approach to technology driven change. New and emerging business models that enable banks to actively make informed decision and choices for the short, medium and long term will be a mandatory part of their reinvention. If however they choose to leave the strategy to chance – or to what it has always been – they may just find that in a few short years, they have less autonomy and influence over their own customers. As open banking and Digital transformation progresses and evolves, banks will no longer have the same exclusivity across the value chain they once monopolised because very simply the link between who offers a product or service, versus who facilitates the execution of products or services are no longer bundled.
In the near future we will review these new emerging business models and what it means for incumbents as well as the range of new players that fall prey to the emerging opportunities being introduced. The biggest threat to banks are not other banks, nor challenger banks and FinTechs but themselves.
By Siraj Patel