How to ensure your financial institution doesn’t survive past 2030

Vinay Prabhakar, Volante: how to free up your staff to work for more forward-looking organisations

Gartner recently predicted that by 2030, 80% of financial firms would go out of business or be rendered irrelevant by new competition. If they’re correct, with over 25,000 banks and financial institutions worldwide, within the next 12 years 20,000 institutions will exit the global financial services ecosystem.

Is that really possible? It is – if banks follow these simple steps to ensure that they don’t make the cut:

• Continue to focus on revenue from fees, transactions and products

After all that’s how you’ve been doing business until now, and things are going well. Some say you need to shift to generating revenue from digital customer-centric value-added services instead. But what does that mean, “value-added services”? And you’re already digital and customer-centric, right?

The fact that 80% of corporate treasurers would be willing to change banks for one offering superior payments services (according to Ovum’s Transaction Banking Survey 2017), and that millennial consumers are two to three times more likely to switch banks than people in other age groups (FICO survey of US consumers 2016), shouldn’t shake your resolve to maintain your current business model. Whoever responded to those surveys was probably somebody else’s customer.

• Forget about open banking.

It’s a fad. The idea that one day you will no longer be in charge of the customer experience because all kinds of third parties will be accessing your banking services via APIs? Absurd. The notion that banks might be reduced to account servicing utilities, with customer relationships mediated by non-bank service providers and fintechs? Nonsensical.

Ok, if you do business in Europe then by all means do the basics to comply with PSD2. Or in the UK, with CMA9. Or in Hong Kong, with the HKMA’s Open API Framework. Or in Australia, with the Consumer Data Right Act (CDR). But don’t go beyond compliance, because given open banking will be going away soon, there’s no point investing in a differentiated approach to APIs.

• Don’t be distracted by all the new competitors.

Everywhere you look, it seems people are worked up about the disruptive effects of new entrants into the payments ecosystem. Challenger banks. Non-bank financial institutions. Fintechs. “Bigtechs”, or GAFA (Google/Amazon/Facebook/Apple). And so forth.

You may also have noticed, with a tinge of envy, that money is pouring into the challenger ecosystem, with challenger banks having raised over $1 billion in venture capital in 2017, more than in the previous three years combined.

You can rest easy, though – that’s the dumb money. The smart money is on traditional banks, because you have so many advantages over the startups. Your technology infrastructure has been around a while, perhaps since the last century, so it’s proven. You take longer to release new products, because of your unique internal processes. You’re more expensive, because you have to maintain more capital, and spend more of your budget on compliance. All of which are very important to your customers, so they’re going to stick with you.

• Ignore demographic changes.

What’s good enough for you and was good enough for your parents will be good enough for the next generation. In the end, these pesky millennials and their “Generation Z” descendants will continue to go into branches, be satisfied with banking experiences that don’t match up to what they get from tech companies, and will call customer service instead of leaving a negative review on social media.

Is that extreme? Fine, but let’s agree that the rumours of a fundamental shift in generational behavior are greatly exaggerated. The same of course applies to your corporate customers. The likelihood that corporations will look at their banking relationships differently as more and more millennials and Gen Z members become treasurers and CFOs is low – isn’t it?

• Avoid the cloud.

This is one is a bit techy but give it proper consideration. People say you should move all your payments IT infrastructure—servers, networking, databases, etc – to the “cloud”, which is – somewhere else. And have someone else manage it. And this will save a lot of money, improve your time-to-market, and help you be more agile.

But you know better. Three out of four systemically important financial institutions may already be using the cloud (according to Microsoft Azure stats), but you’re not going to make that mistake. Your secret weapon is the fact that you own your data centers, and have an army of IT people to fix things when they break and make updates when compliance rules change. What will they do if you move everything to the cloud?

• Give real-time payments (RTP) a pass.

It’s striking, isn’t it, the effort that has gone into creating new RTP networks across the globe? Depending on the definition used, anywhere between twenty and fifty countries have live real-time account-to-account payment networks. Some regions even have multiple competing real-time schemes, like RT1 and TIPS in Europe. You might be tempted to conclude from all this activity that there are business opportunities in RTP worth investing in.

That would be foolish. Examples of RTP success – the billion-plus transactions that go through the UK’s Faster Payments Service every year, or the 81% year-over-year growth of the US Zelle network – are obviously outliers. Your customers aren’t demanding RTP services, are they? They probably don’t even know what RTP is, and it’s not your job to be a trusted partner to them by raising their awareness of new market offerings. Let your competitors waste their time on that.

• Keep fintechs at arm’s length.

With the prospect of 25% of revenues in payments and lending potentially at risk due to marketplace disruption (according to EFMA), an increasing number of banks are seeking to improve their competitive position by openly collaborating with fintechs to create new products and services.

Sadly, your peers who have gone down this route are making a big mistake. All this stuff about collaboration and co-innovation with fintechs is hype, generated by those self-same crafty fintechs.

Don’t be taken in – fintechs are competitors. They don’t know anything about banking, you know everything about banking. If you need to build something, build it yourself.

• Wait for others to innovate.

This one’s a no-brainer. Despite the fact that 87% of financial services firms have active innovation programmes (according to Capgemini), we all know innovation is hard. It means changing your organisational culture and allocating budget to activities without a firm business case. It requires that you break down silos, and transform your technology infrastructure to take advantage of open banking, RTP and the move to the cloud. But ultimately, it means becoming more customer-centric and value-added service oriented, and behaving more like a startup than an established financial institution.

All of which we just agreed, aren’t worth doing. So leave innovation to others, and be satisfied with being a fast follower. It’ll save a ton of money and effort.

The challenge is clear. Follow the above guidelines and prove Gartner right, thus freeing up your staff to work for more forward-looking organisations!

By Vinay Prabhakar, VP, product marketing, Volante Technologies