Big banks face two major challenges today when it comes to offering customers the experience they want:
- New FinTech disruptors offering traditional banking services at cut-throat prices and fuelling the commoditization of banking services
- Aging legacy systems that are incapable of offering the Facebook-like ease and functionality consumers expect.
Of course, financial institutions have made efforts to alleviate these pain points.
Mobile site and branded apps help bridge the gap between digital experiences and customer expectations. And some banks have gone further, acquiring digital-first organizations (Scotiabank buying ING Direct springs to mind).
However, these success stories still leave plenty of the market under-serviced – creating opportunity for FinTech startups and costing traditional institutions significant market share.
And while there’s been plenty of discussion over digital transformation in the last few years , the challenges of this sort of organizational change have become increasingly evident.
Digital transformation remains a slippery eel that financial service providers just can’t seem to grab on to.
Challenges of digital transformation
The major challenges facing banks are:
- Cost. Upgrading legacy systems while running a business is extremely difficult to do, and even more challenging to do on a budget.
- Digital transformation calls for a complete overhaul of how traditional banks work, and there’s plenty of internal resistance to those changes. With an entrenched culture of rapid shareholder returns, it’s a difficult business decision to sell given the long return timeframe.
- The innovative and rapid iteration of a fail fast and fail often culture that sits at the heart of a digital first organization is difficult to implement at scale, particularly where individuals not incentivized to take personal risk for institutional gain.
- Digital transformation requires significant buy-in from BOTH manager-level administrators and C-suite executives.
- Digital transformation is inherently risky. Not all organizations have an appetite for it.
These reasons make actual transformation almost gruellingly difficult. What’s more, organizational-wide transformation is often based on a timeframe of five plus years, with returns expected to land sometime after that.
Which, in turn, raises the problem that in five years, whatever technology is implemented today will be out of date…
… Further contributing to the problem of getting organizations excited about paying high transformation bills.
What can traditional banks do in this doom and gloom situation? Are they destined to never transform into a 21st century organization and go the way of the dinosaurs? In 100 years, are people going to look back at the big banks the way we look back at fletchers and blacksmiths – old industries, long since cast by the wayside as we opt for new information management solutions?
In short, no. Here’s how traditional banks can win despite these challenges.
Where traditional banks can win
Major financial institutions have two unfair advantages over everyone else in the financial industry, and can potentially exploit a third: product breadth, customer data, and (potentially) brand power.
A combination of regulation and capital requirements make financial services extremely difficult to crack into. That’s why across the world there are far fewer banks than, say, shoe shops.
What this means is that most traditional lenders today have been around for a while. BMO, for example, was founded in 1817, and the rest of the Big Five were founded within 50-ish years of this date (yes, TD was amalgamated in 1955, but we’re taking the founding dates of the original banks).
And over the years, they’ve all hugely expanded their product offering.
All the major Canadian retail banks offer everything from mortgages to checking accounts to complex financial trading to consumer and business insurance. Even smaller credit unions have a robust product offering, creating the possibility for a one-stop shop for consumer financial services.
Since most consumers don’t want to shop for and manage multiple banking providers, they’re much more motivated to get all their services from one company.
Banks hold a staggering amount of information on their customers. A combination of Know Your Customer (KYC) and practical requirements mean that banks can speak to their customers with an intimacy other enterprises only dream of.
The challenge, of course, is uniting that data into a usable and comprehensive way. Data is often strewn across organizations with different structures incapable of sharing it.
This creates a negative customer experience, as it seems like banks don’t know who their customers are.
For example, if you have a mortgage with a bank, when you apply for insurance you shouldn’t need to fill out your address. The bank should recognize who’s applying and be pre-populating those fields.
This, of course, is the core problem with legacy systems. Simple data integration is extraordinarily challenging, leaving customers frustrated – and willing to leave in search of a personal touch.
However, that same data can be extraordinarily powerful as a tool if leveraged. For example, banks can run targeted, specific ad campaigns to upsell their customers with devastating accuracy because of how much data they have.
Major banks have long histories of serving their customers, and the ad budget and resources to tell that story well. That means that they can buy the top of mind awareness and unified, consistent messaging to build their brand.
There’s one more strength: innovation
Innovation isn’t something that’s usually associated with the financial industry. In fact, it’s usually better known for its slow, clunky pace.
But that’s changing fast.
Of the big five banks in Canada, almost all of them run internal innovation labs like the Scotiabank Digital Factory (pictured above) or the RBC Digital Innovation Lab. Even those who don’t run their own labs regularly partner with startups and incubators to develop new ways of doing business.
Ironically, big financial institutions are some of the best-positioned organizations to innovate. Their size and market penetration mean new ideas can reach customers extremely quickly, removing a major roadblock for FinTech startups.
Second, financial institutions have the capital to fund new innovations, either through external innovation hubs or internal digital labs. Few other enterprises have the same access to capital (save maybe car companies) to drive innovation.
What it all means
Digital innovation is coming for the financial services sector. Arguably the laggards on the tech innovation curve, there’s no doubt that it is on its way. And while there will undoubtedly be some erosion of major bank’s market share to new service providers, they’re are hardly down for the count.
With robust product offerings, oodles of customer data and strong brand development and recall, big banks stand to gain in the new diverse financial world as much as any FinTech. And with excess capital to invest in both internal and external innovation projects and huge customer bases, they’ll have an easier job of it than even the pluckiest of startups.