Why retail banks should not be afraid of collaboration, even with tech giants

Michal Kissos Hertzog, Pepper: successful fintechs have customers at the heart of everything

The entire banking sector is currently adjusting to an unprecedented state of transformation spurred, primarily by the rapid growth in technology. In fact, technology’s impact has truly shattered the certainties of previous eras within banking.

The number of bank branches on the high street was once a barometer of their success. Now, as they close at record rates (over 6,000 shutting down in the UK since 2010 to be exact), it’s clear that incumbent banks don’t have the dominance in the consumer current accounts market any more. In fact, the big four legacy UK banks have seen their market share on current accounts drop from 92% to 70% in just ten years.

Technology has helped fintechs like Monzo and Starling to scale massively, enabling them to successfully compete with incumbents. Aside from the technology, these fintechs enter the market with an entirely different business model to the incumbents – one which is focused on the customer, not a profit and loss model. As a result, they have shaken up customers’ expectations of what they want from their bank. Now, with technology giants getting in on the action too – seen by Apple’s recent Apple Card announcement – such traditional banks sitting on the side-line without truly digital services are at an even greater risk of becoming irrelevant.

Too clunky to change quick enough and become consumer-centric and keep pace with fintech and tech giants, the incumbents must collaborate.

The importance of customer centricity

Outside the changing dynamics of the bank industry, we have seen a seismic shift in the way consumers interact and what they expect from not just banks, but any business. We now take personalised and seamless digital experiences for granted and the consequences of failing to deliver this, can be significant. Notably, after a bad digital experience, 22% of consumers cut their spending with the company in question and 19% stopped their relationships completely.

Fintech and tech giants are successful because they provide excellent customer experiences and focus on delivering a solution to a genuine pain point people have. They put customers at the heart of everything, from product development to pricing strategies to services designed to address their needs. By applying this data-driven, customer-centric model, a fintech like N26 has acquired over one million customers in just under three years. Meanwhile, a new insurtech firm, Lemonade, has acquired over 250,000 customers in just under two years.

In today’s world, the real profit derives from trust, loyalty and satisfaction on the part of the customer. Only a company that honestly implements a customer-centric approach from price to service to marketing, will succeed in building relationship and trust that will result in lasting loyalty which is then followed by profit. This, of course, is not an easy transition because the numeric transition is far from being linear, banks will usually see a certain drop in the numbers in the financial reports but in the long term it’s essential.

The importance of a digital core

Many incumbent banks are undergoing painful and extensive digital transformation projects to compete in today’s highly competitive market. However, when it comes to actually implementing new technology in their day-to-day operations, banks, in the majority of cases, are just building a digital skin over legacy systems. A recent report by Pepper, “Change in Banking”, found eight in ten (82%) decision-makers at retail banks think they are not innovating fast enough to meet customer demands for digital services and over half (53%) think it takes longer to innovate due to legacy IT systems.

Building a bank with an entirely new digital core, might seem like a leap into the unknown but it will help banks streamline processes and reduce costs, which are instead currently being used to maintain legacy systems. In addition to this, it will enable them to have a system ready for whatever the industry throws at them – whether that’s new legislation or a particular increasing customer demand. In addition to this having a digital core will allow incumbents collaborate better, and with more, tech companies as their systems will be agile and adaptable. Without a digital core banks are limited and will always be slower to react to ever-changing industry demands.

The advantage banks have in the “fintech era”

The implementation of PSD2 is proof that traditional banks no longer hold the monopoly on customer data. However, arguably even when they did, they were notorious for not utilising it – thanks to their complex legacy system and siloed departments.

Data is the key to boosting customer engagement and creating a high level of trust but knowing what data to use and how to use it is essential.

Fintechs and tech giants are not tied down by legacy IT systems, they have been able to use customer data to truly understand who they are and provide a personalised digital experience. So, in an era where fintechs and tech giants appear to have the upper hand when it comes to effectively using customer data the opportunity for traditional banks lays in collaboration. However, incumbent banks are often too “proud” to collaborate or adopt technology which they do not own. Instead, many are seeking to build their own, based on their legacy IT. But, at a time when consumers are prioritising real-time, personalised user experience and relevancy – this approach is just not fast enough. With a digital core banks will be able to collaborate easily and utilise the valuable data they are sitting on.

Only by collaborating with fintechs or tech giants will incumbents be able to catch up with the market and become truly consumer-centric. It will not only give banks access to the technology they are lacking but also, crucially, provide a different and new perspective on creating and maintaining an excellent digital experience for customers.

By Michal Kissos Hertzog, CEO of Pepper