By Rajashekara V. Maiya, VP, Global Head-Business Consulting, at Infosys Finacle
Banks and banking are facing an existential crisis. Brands that represent security, reliability, and dependability are being elbowed aside by cool, digital upstarts. Despite reputations built over hundreds of years, traditional banks are under threat from businesses launched with not much more than conviction and capital.
The pace of change in banking is worth emphasising. The next generation to open bank accounts will know nothing of cash or cheques, they will pay and be paid using their phones, and may never set foot inside a branch. In reality, they may choose Amazon or eBay (or in the future, Twitter…) as their account manager, since money is, for them, an entirely digital concept.
In this worldview, almost everything arrives as a service. What started as a software revolution, where subscriptions replaced purchase (remember installing software from CDs and DVDs?), the as-a-service phenomenon has spread to every nook and cranny of life. You could even say that Lyft, Uber and ZipCar offer transport-as-a-service; the thing (the car) is no longer important, and the differentiator is the service level and the associated brand.
Tomorrow’s banking-as-a-service is therefore inevitable. In future, banks, retailers, telcos and who knows who else will all offer the same fundamental capabilities. Attracting and retaining customers will therefore depend on brand attributes, such as confidence, trust, and even coolness.
Two strategies, one objective
Faced with this level of turmoil, the banking industry seems to have developed two very different strategies designed to reach the same digital destination.
The first route is to extend existing capabilities – the usual shorthand for legacy modernisation and digital transformation. All banks now offer a mobile channel, and new services are developed and deployed within or as extensions of the current framework. What was originally a transaction payment platform now incorporates retail trading, crypto-currencies, loan arrangement, credit management, and much more. Some of these are standalone solutions with (often complex) connections to the core banking systems.
Even though progress has not been particularly quick, banks have reinvented their digital presence. Luckily, traditional banks enjoy a vast store of trust, and despite the slow rate of change their customers are loyal. Naturally, Open Banking and the Current Account Switch Guarantee have encouraged some degree of customer churn (approximately 8 million of a total 50 million accounts), but banks still occupy the traditional high ground as ‘a safe place for your money.’ But there is only so much time before customers look at the latest fintech start-up.
The second approach is to leap forward by launching an entirely new digital operation, such as Marcus from Goldman Sachs. Greenfield start-ups can move fast, deploy new services, and invent new ways to do business without the drag of existing processes and systems. The penalty is that there is no history of loyalty, and customers who sign up easily to new services can also quit easily. But the aim is to captivate and capture new customers, and, over time, migrate all account-holders to the new platform.
Different route, same destination
Both of these strategies are based on how the bank might model its operations; either develop and extend existing systems, or leap forward to an entirely new operating model. In essence, these strategies are built from the banks’ point of view, by considering the services being offered and selecting the best route to achieve delivery.
Yet successful as-a-service companies tend to see the world through the customers’ eyes, and customers see brands. As Jeff Bezos remarked: “There’s nothing about our model that can’t be copied over time. But McDonald’s got copied and it’s still built a huge, multibillion-dollar company. A lot of it comes down to the brand name. Brand names are more important online than they are in the physical world.”
Banking-as-a-service means that customers will look for brands that meet their expectations, and the underlying operational machinery is not relevant. Whether Amazon is run from Jeff Bezos’s garage or from huge warehouses, customers do not care. And notice that customers trust Amazon to provide choice from hundreds of sellers.
The Amazon shopping-as-a-service model provides the equivalent of a bank offering mortgages from multiple possible providers, or loans from different lenders. Banking-as-a-service creates a model based on the customer, based on Open Banking and agile, open technologies. In turn, customers will place their trust in the brand.
For some banks, the challenges around banking-as-a-service are cultural. A “not-invented-here” mentality may impose technical drag, and a natural aversion to change can produce management inertia. Leaping forward by creating a Marcus-like fintech brand can overcome many of these issues, but this approach requires absolute buy-in from senior management that a new brand is worth the investment risk.
Ultimately, the two strategies lead to the same destination: the use of enabling technologies of legacy modernisation, cloud enablement, and digital transformation.