Banking Insight, 2013. Original article.
Technology is the winner in banking innovation
The most exciting innovation in financial services right now are coming not from the banks, but the technology providers. And it is collaboration, not competition, that will win the game.
Banish jargon, be fair on fees, and ensure full investment transparency – these were key features when Nick Hungerford set up Nutmeg, the UK’s first online discretionary investment management company. Sure, the fintech startup is cute and clever, but as a true David in a world of Goliaths it begs the question: in times of financial uncertainty, why would Nutmeg be the customer choice over an established, proven financial institution?
For today’s adult banking customers, a company like Nutmeg may not come across as a serious contender. But by 2020, the still-under-30 Generation Y will match their older peers in terms of income, according to estimates by Javelin Strategy & Research. And these are the customers who may well look to a company such as Nutmeg and find it is exactly up their street: a no-nonsense option in a stuffy industry, the ability for each user to personalise the experience while at the same time, the option to do it all online without time-consuming meetings with financial advisors.
“We are proud that we are reforming an industry that has grown so bloated on its own profit margins that it has not always put the customer first. … We are proud to have helped so many people get one step closer to their financial goals,” said Nutmeg co-founder and chief financial officer Nick Hungerford, a former Brewin Dolphin stockbroker and Barclays wealth manager. Nutmeg’s social responsibility is a refreshing touch for younger customers, whose money are safeguarded by a custodian bank holding the investments on behalf of the regulatory-approved business. This leaves Nutmeg to focus on creating the sort of personalised and transparent service its next generation customers are looking for.
As the internet revolution continues to change the financial industry, Nutmeg has understood something vital: banking no longer exists in a vacuum. In a world where plane tickets can be bought online at midnight and tax returns can be filed in the same way, people are no longer willing to accept a banking system that requires taking time out of a busy work day to go and queue at a till. Especially those who have grown up with multitasking smartphones and retailers with one-click ordering are going to be looking for the same ease when it comes to choosing their banks and investment providers.
“Customers judge across their entire set of experiences rather than just comparing your organisation to others like it. We want our technology to be as intuitive and user-friendly as Apple products, the service we receive to be as thoughtful as we might get from Nordstrom, and personalisation and ease of payment as good as Amazon’s,” Rita McGrath, associate professor of management at Columbia Business School, wrote in Forbes. This seismic shift means a bank’s main competitor is not necessarily other banks anymore, but a telecoms provider which has picked up clever new technology to service its clients. Just consider that 55 million Africans use basic mobile phones to transfer money, resulting in an industry worth USD 61 billion last year, according to research from Gartner.
What customers want
Peers of Nutmeg include mobile-optimised banking solution Moven, social banking outfit SmartyPig, and next generation money transfer expert Dwolla, to name only a few. These will not be the names found on in the rankings for the most innovative banks, but their presence is a vital influence when the big players set out their innovation strategy.
“For four years since the financial crisis, banks have been heads-down focused on efficiency, cost cutting and in the worst cases, simple survival. But the rest of the world is not waiting for banks to bounce back,” Jeff Carter, chief development officer of technology company EyeLock and founder of the Center for Future Banking, wrote in American Banker. Carter acknowledges how innovation was in part to blame for the financial crisis, in the sense that it inspired hard-to-understand financial products, but while the industry licks its wounds, the world is moving forward at breakneck speed and old rules are being rewritten.
For example, 43% of US and UK Apple product owners would dump their current bank for Apple, according to a survey by research consultancy KAE. This may seem like an odd statistic, but it says a lot about the kind of ease of use people are looking for across all their services. The trend for banking to become more fragmented and decentralised leaves room for also smaller players to make their mark. Noted Lee Powney, marketing chief at KAE: “It would take a remarkable display of discipline [for Apple] to resist” moving into banking; “This research tells us Apple customers perceive a fit where at first glance we would assume the brand could not travel.”
Digital banking is set to overtake branch networks as the main way customers interact with their bank by 2015, according to findings in PwC’s 2012 report ‘The New Digital Tipping Point’, but commercial banks have been slow to step up to this challenge, said Robin Roy, associate director of financial services of PwC India.
“The lack of investment is perhaps even more surprising considering banks are struggling to grow revenues at a time of increased regulation and an increasingly volatile economic environment. Digital products are a significant opportunity for banks to grow revenues and serve their customers in a way that they want,” said Roy, noting that although banking customers are increasingly willing to pay for innovative services, the majority of banks still only provide basic mobile and internet banking services. 69% of customers said they use the internet to purchase financial products, and 33% do this via their mobiles, the latter being a rapidly growing segment.
It is perhaps no surprise then, that FastCompany’s shortlist of the world’s ten most innovative companies in finance only contained one traditional financial group: American Express. First on the list is Square, the little piece of hardware that enables vendors to take credit card payments straight onto a mobile device. Lending Club has been credited with bringing peer-to-peer lending to the mainstream, while OpenGamma is praised for its open-source risk management software. PayPal makes the list for its new in-store payment initiative, where customers can pay via the system even if they have forgot their wallet. PayPal, which was originally set up to handle online transactions in a time when standard banks deemed them too risky, now boasts 125 million users and processed USD 14 billion worth of transactions just via mobile last year; mobile payments are just 10% of the total.
Having said that, there are also plenty of banks who are pushing ahead in the innovation game. The annual ‘Finacle Global Banking Innovation Awards’ from BAI-Finacle and Infosys recognises banks for their innovative breakthroughs, selecting the winners after considering over 150 financial groups from 30 countries. First National Bank, a division of FirstRand in South Africa, was named Most Innovative Bank in 2012 due to its culture of innovation and advancement of retail banking. An internal competition formally encourages and supports new ideas among staff, and business units at the banks are given the power to move forward with ideas through leadership buy-ins.
OCBC Bank in Singapore was awarded for its product and service innovation, due to its practice of designing branches especially to service Generation Y customers. This means locating them in shopping centres or school campuses, using approachable language and playing popular music, and letting customers use interactive touch screens to shop for products. DenizBank of Turkey was also hailed for its channel innovation following its Facebook banking platform, through which users can access their personal data and perform financial transactions. Lastly, Alior Bank in Poland received the award for disruptive innovation due to its virtual bank which offers full financial services to Generation Y users, including the country’s first fully online credit checking process.
PayPal, which blossomed by taking a chance where traditional banking would not, may justifiably be the sort of example that creates a source of stress for bank managers keen not to miss out on the next big thing. At the same time, banks face stricter regulatory pressures with Basel III in Europe and Dodd-Frank in the US, forcing them to deliver certain minimum capital and liquidity ratios, new data protection requirements and the challenges of balancing the threat of cyber fraud in an age where customers want quick and easy digital access to their money. In its 2012 report, ‘Optimising banking operating models’, KPMG issued the stark conclusion that for the foreseeable future, banks must acclimatise themselves to negative or low growth in the developed world: “To overcome inevitable loss of scale and cost issues, … [a]n imaginative approach is needed to cut costs and control a disintegrated value chain.” Fragmentation has already started to happen, noted report author David Sayer, global head of banking at KPMG UK, with financial groups across the world already having started disbanding its central operations in favour of into individual business units.
The adaptation of new technology will play a core part in the future of banking. Ramesh Nair, partner in the financial services team at Booz & Co, spoke of technology as an opportunity to provide customers with convenience, control, recognition, and transparency in a 2012 report on how banks can use emerging technologies to provide better service. Identifying the key areas of mobility, high end analytics, big data management, next generation data processing, cloud computing, and service-oriented architecture, said Nair: “To make use of these key enablers, organisations will need to refine their operating models, governance, data and application management, and technology architecture.”
In other words, some pretty major change is required. Investing in ageing IT systems will be a key challenge for banks, however there is no reason to reinvent the wheel with every new feature. For example, Visa is using cloud computing to access fraud data models from Google, noted Booz & Co; this cuts down model- building time from one month to 13 minutes. As cloud computing becomes more secure, this kind of outsourcing is becoming increasingly common. As is the pairing up of mature financial companies with smaller technology companies with good ideas – why compete if you can collaborate?
One example of how this can be done is PermataBank in Indonesia, which has teamed up with mobile money technology expert Monitise to launch a payments service for BlackBerry. Owners of the smartphone, which is popular in Indonesia because Messenger is free to use, can use the service to transfer money directly between handsets, bypassing branches or even banking apps. Monitise Asia Pacific Chief Executive Darren Sugden said:
“This launch is a ringing endorsement for how businesses with different commercial needs can collaborate in the fast-growing mobile, payments and banking space.” Vodafone India also has years of experience teaming up with local banks, starting with HDFC Bank in 2011 and now ICICI Bank, to provide mobile money transfers and payments. The M-Pesa scheme targets rural areas where bank branches are few and far between, meaning mobiles are often customers’ only banking tool.
A cultural shift
Considering the magnitude of the challenges faced by banks as they strive to stay innovative in tumultuous times, no one claims to have the definitive roadmap to how this should be done. CEOs are acutely aware that innovation is necessary to stay in the game, knowing the tech-savvy Generation Y customers are growing older every day, but at the same time the banks face stricter regulation and constant demands from shareholders for reassurance about strategy, and ultimately, cold hard cash.
The good news is that new and clever fintech companies are being incubated every day; Accenture launched the FinTech Innovation Lab London last year to help promote new solutions for the industry. Support and mentorship for the new companies are provided from world-leading finance names such as Barclays, Credit Suisse, Deutsche Bank and HSBC, who can bring experience, scale and global customer networks to the table. While banks need their own internal programmes to support innovation, looking around to see what else is going on may prove to be a fruitful solution – pairing up with a cool new startup with a great idea is after all a great way to tap into some of those Generation Y sensibilities of simplicity, transparency and social responsibility.
“As a critical component of the transformation now facing them, banks should take the time to examine their cultures carefully across four dimensions to ensure they are fostering value creation,” Toos Daruvala, a director of risk management wrote in McKinsey’s annual review of the banking industry. Not as easy as it sounds, this, as it requires a willing heart to reassess issues that lie at the core of the financial industry. It also requires, noted Daruvala, the balancing of the interests of shareholders and society as a whole, creating value for customers, ensuring the soundness of internal processes, and influencing the mindset of employees. But as the internet revolution roars ahead, anyone who thinks these changes can be kept to the sideline must think again: “Directors and senior managers should view cultural transformation as a strategic issue, not a public relations problem.” In other words, the world has changed, and banks must change with it. Innovation is the word, and there is no alternative.