A number of challenger banks in the UK have shaken up the status quo, disrupting a retail banking sector dominated by incumbents who for most part of have not fully optimised their digital offerings. Fintech providers are focusing on excellence in one or two areas and offer a complete digital experience, whether that's consumer bank accounts, savings, international money transfer, or another part of traditional bank services.
Traditional banks are attempting to keep up with these rivals—Lloyds, for example, has just announced that it will invest over £3bn in technology over three years. But any holes in this strategy runs the risk of letting customers slip through the gaps as they fail to meet customer demands and fall into the lap of dedicated fintechs.
Regulated into change
The introduction of Open Banking earlier has made it easier for fintechs and other providers like internet companies to enter the market by using open APIs. Bank data is no longer solely owned by banks—customers can grant access to service providers they trust. To date the main competition to banks has been from specialist fintech providers, but now big brands such as Google, Amazon or Facebook could potentially offer services that use a customers' bank data. Regulators hope that this will increase competition and create a marketplace of banking products, with easy comparison and switching. Banks need to maintain their position in the market and strengthen their brand.
Open banking means that those parts of the business where digital services are not available or underdeveloped will be those most at risk from fintechs and other third parties. Is your bank lagging behind and providing a mediocre service in one particular area? Simple—just switch to another service. Open banking will make it painless.
Exposure to new services will raise customer expectations—if new entrants can offer slick digital services, why can't those banks with big budgets? Mobile is now a need-to-have and foundational to the customer relationship, not simply an afterthought. Banks, under pressure from regulation and competition, have understood this and invested much in the mobile channel, but their solutions are incomplete. Freezing a lost debit card, setting up a payment to someone new or accessing historical statements are just some examples of where gaps exist.
Customers will disappear through these gaps, either moving wholesale to competitors or choosing to connect third-party providers where they feel their current provider is lacking. Digital and mobile access to all services, rather than being a future requirement, is essential now.
Embracing digital transformation
Many challengers are putting technology at the forefront of their offerings, building new infrastructure and focusing on digital and mobile to attract and engage users, while simplifying the overall experience. Starling Bank, Monzo and Virgin Money, for instance, all offer modern and user-friendly interfaces, a personal touch when it comes to customer support, and crucially can complete a digital account application in less than 10 minutes.
Incumbent banks are starting to adopt faster onboarding, but in general the process is usually an arduous one for the consumer, requiring a visit to a branch to complete paper-based processes. Many of the high street banks simply do not have in place the technology to offer a fully digital, mobile-first experience to their clients.
According to a report by analyst John Devlin of PAID Strategies, traditional banks "have yet to make significant progress in fully on-boarding customers through the mobile channel despite marketing claims [and] focused on the front-end of the account application process".
Digital transformation for many banks has so far been a patchwork process rather than the revolution promised, and this has consequences.
Identifying and plugging the gaps
In order to close the gaps that consumers may fall through, it's vital to ensure that the relationship between bank and customer is fully digital. There are several key areas where banks are currently failing.
- Digital onboarding—All a customer should need to open an account and prove who they are is the appropriate government ID (for KYC purposes) and the high-resolution camera standard with any smart device. Together a consumer can share verified credentials from the comfort of their sofa if they choose to. If the requires a customer to send material through the mail or visit a branch, consumers are likely to abandon the service before they even complete the application. Making onboarding simple and convenient for the customer is paramount—even if every other part of a service is fully digital, this onboarding process is where the customer will get their first impression of a service and decide whether it is for them.
- Aggregation and Personal Finance Management—While Open Banking increases competition and means that customers may hold financial products with a number of providers, the irony is that there will be a need to bring these together and create a single view. Customers, after all, want both competition and convenience. While there will be specialist services that will look to create this single view, there is no reason why a bank cannot provide this aggregation. This also gives them the opportunity analysis, and personal financial management that can help customers make the most of their money. With a digital identity, banks can help anchor these accounts to one person.
- Identity Management—Open Banking is not the only regulation in town. GDPR rules mean that the customer has the right to know what data is held on them, and have it deleted if appropriate. Anti-Money Laundering rules demand that financial service providers know exactly who their customers are in order to create an audit trail. There is an urgent need for a trusted broker of identity that can help maintain compliance with these regulations—and banks are primed for this role. By establishing digital KYC at onboarding, they can also provide reassurance to third parties of a customer's identity. Banks can help people maintain their digital lives and provide a core service to the digital economy.
A digital relationship
Closing major gaps needs to be complemented by closing every small gap too: every interaction between customer and bank needs to be possible without leaving the banking app. Even customer service needs to move away from call centres and towards being able to respond in-app to queries and complaints—potentially using chatbots for simpler enquiries. Once every gap is closed, banks will find that they are far less likely to lose their customers to rivals.
Incumbent banks have a big disadvantage in this race thanks to the burden of legacy technology and infrastructure, but this cannot be used as an excuse to postpone or avoid 100% digital transformation. Only by creating digital identities will they ever truly establish digital relationships with their customers.
Rene Hendrikse is European MD of Mitek.