On 4th of November 2015, DataArt held a financial roundtable event at the Armourer’s Hall in the City of London. The event brought together senior financial services executives to discuss the nature of change in the industry.
The speakers were:
- Cliff Moyce (Strategic Advisor, DataArt);
- Chris Barker (Managing Director, Global Head of Digital & Engineering Services, RBS);
- Mike Powell (Managing Director Enterprise Capabilities, Financial & Risk, Thomson Reuters);
- Scott Eblen (Chief Product Officer, Nutmeg);
- Frank Neumann (COO, Quantstore).
The roundtable was chaired and moderated by Chris Skinner of the Financial Services Club.
After the roundtable session was completed, discussion continued in the networking area where topics were revisited, new insights discovered and ideas exchanged.
The premise of the evening was that clients of financial services organisations are increasingly expecting and demanding the levels of innovation, access and usability that they enjoy in other areas of their professional and personal lives. Furthermore, Fintech companies are offering competitive business models and challenging the role and relevance of today’s banks.
Cliff Moyce commented that historically isolated innovation functions and an absence of a culture of change has left banks susceptible to a major competitive threat from companies such as Facebook (with its payments transmission service between users), Amazon, Alibaba, Google etc. Referencing the classic business book by Rosabeth Moss-Kanter, Cliff Moyce stated that “the elephants must learn to dance” and argued that much of what passes for innovation in banks is simply “rearranging deckchairs on the Titanic and ignoring the icebergs”. He argued for banks to take a much broader look at their business horizon instead of simply improving what they have now. Cliff felt that the secret of success in financial services will be building and utilising user-friendly platforms and turning customer bases into communities i.e. the same model as used by firms such as Alibaba. He cited Metro Bank as an example of a UK organisation trying to do just that. Cliff mentioned the report by The Disruption House (Why Banks are failing the Innovation Test) which argued that banks need to improve their competence in change and innovation at the leadership level, and make it an important selection criterion for such roles. Cliff finished by pointing out that there are 2.7 billion economically active adults in the world who do not have bank accounts, many of whom will start to use financial services for the first time through smart phones – and they may never become customers of a traditional bank.
Frank Neumann said that banks can avoid disruption if they choose to embrace change, be it transformational or evolutionary and that change is the only way to survival. Yet it remains to be seen whether this knowledge will lead to timely and sufficient action by the banks. As an example of a failure to act, Frank mentioned travel agencies like TUI and Thomas Cook who lost much of their market share to online travel agencies like Expedia. He noted that banks have been slow to embrace change due to a combination of political, structural, technological and cultural factors and mentioned that although it’s difficult to predict the future, he expects big data and semantic data mining to become more important within communities and platforms.
Chris Barker saw the iceberg as the interrelated banking business model, where some business areas sponsor others, providing attractive offers to customers like free bank accounts, or free ATM withdrawals, yet exposing the whole business should Fintech competition erode the profitable function, projecting a knock-on damage on other functions. He felt that there is a need for banks to unbundle this interdependent inflexible model into self-sufficient competitive services. However, given the bank’s large size and inability to move quickly, the lack of innovative culture, the risks involved in such radical change, and budgets tied up in responding to regulatory and other pressures, a more realistic approach seems to be rebuilding the business architecture through “co-innovation” – complementary alliances with new innovator start-ups.
He argued that one way to achieve this is by creating open platforms that will allow innovative, dynamic partners to enter the bank’s system and complement bank’s core products with their services that are not being served as efficiently by the large bank. While the idea is not new and many banks are creating platforms, they are not yet truly open. Open innovation is at the heart of the digital revolution. For enterprises this translates into a process of engaging with external technology solutions early on in an innovation process. One benefit of an open platform is that the bank does not need to look for partner companies to provide complimentary services to its core competence, but instead reshapes its model into an open one, creating an ecosystem that will grow and improve quickly and organically as Fintech companies bring their services to the open platform. Open API is an example of an open platform. It allows external technology solutions to connect to existing core banking platforms, access all areas of the bank system and build upon the bank’s platform to offer a range of services including P2P lending and money transfers. One possible downside of open platforms for banks is the danger of losing their core competence business to Fintech companies if they are able to better serve a particular need.
Chris reminded the audience that PSD2 payments regulation to be implemented in UK by 2017 also demands that banks open their platforms to external banking solutions so
developers will not need the bank’s permission to enter their system. Bank will essentially become a marketplace for financial services, based upon the merit of satisfying a particular customer need best, constituting the mix and match and the pick and choose future of banking services.
Mike Powell noted an imbalance of innovation with much focus on consumer interaction while the need for innovation at the backend is not being addressed. Because most of us are consumers of financial services, bank customer experience is well understood and improvements are easily created. As we move away from the customer and retail banking, towards commercial, institutional, investment banking and capital markets, it gets more difficult to innovate as there are fewer people that understand the intricate inner workings of those systems. Moreover, innovation in these ecosystems involves higher budgets and outstanding reputations.
Scott Eblen from Nutmeg offered a valuable insight of not only placing the customer first, but placing technology last. He stressed that customer experience is what’s important to the user and that using new technology to reshape some aspects of today’s business is less powerful than the Google way of looking into the desired customer experience and then seeing what technologies need to be developed, evolved or integrated to enable such experience.
While it is clear that the digital revolution in financial services is under way, the impact on incumbents remains unclear. The future of their business will depend on their ability to embrace change and it’s essential for the banks’ leadership to recognise that merely navigating the labyrinth of regulation won’t guarantee success nor survival. Success factors mentioned include focus on the customer experience, culture of innovation at the top-level management, rethinking current business models and embracing collaboration with Fintech companies to bring innovation to financial services in pace with changing consumer demands.