Banking's competitive landscape - what can smaller banks do to thrive?
With competition emanating not only from fintechs but also leading technology companies, it has become extremely difficult to grow or even maintain margins. The banks have the advantage that they have the customer base, however the advancement in technology is reducing the barriers to offer different financial products by fintechs and technology companies. We have already seen the proliferation of a variety of players in the payments space offering digital wallets, merchant services, payments rails, for example. PayPal, Square, Stripe, etc. The same is happening within the credit space with buy now pay later firms popping up, technology companies like Apple offering cards and even retailers offering their own credit facilities, thereby eating into the margins of the banks. Even Google has plans to introduce checking and savings accounts in tie-ups with banks. Smaller banks, at times are further disadvantaged especially in terms of funding available to invest in technology and innovation.
What it all means is that banks need to be extremely responsive to both customer stated and latent needs as well as keeping a close track on the emerging competition. Banking
business has evolved over the years based on prevailing market conditions, customer needs and growth strategies. The business focus has evolved from products to channels to customer to enhanced experience and self-service models. The user experience and the self-serve models are where the technology players have an advantage based on the number of users on their platform (e.g. Amazon, Google) and the trove of data that they have providing meaningful insights. Competing with these players would mean that banks itself need to continuously review their systems and technologies, be more agile and create an ecosystem to be responsive to customer needs.
Banks have multiple technology challenges to resolve before they can really tackle the competition. The traditional Go To Market (GTM) model based on a loyal customer base, cross-selling, and up-selling is no longer effective as customer profiles have changed. The younger generation have been exposed to the best of digital technologies and the level
of loyalty may not be at par with previous generations.
By providing the flexibility to make use of only specific elements of the standard data set, services can be created that are as simple or as complex as needed for specific outcomes or as specialised as needed by specific categories of financial transactions.
Additionally, it’s difficult to differentiate on banking products as those can be easily replicated by competition. The low interest regime has further put pressure on what a bank can do on the pricing strategy for their customer base.
The ability to retain the current customer base in itself is a challenging task, hence banks should look at what they can do to maintain their customer base and also achieve growth. Lower tier banks are at disadvantage vis-a-vis their larger peers when they are also targeting mass market and have lower investment appetite across different parts of business including technology.
Technology plays a key role in banks today to offer the products and services to the customers. Banks have typically created a two speed IT environment over many years. First,
we have the back-end systems that are expected to be stable, change less frequently, and require more effort, time and cost to be upgraded. And secondly, you have the customer facing applications that are expected to be agile and responsive to the customer needs, e.g. the digital channels.
One of the reasons for the establishments of such environments has been the legacy core banking systems that banks have invested in over the years. Core banking systems were designed with stability in mind and expectation of less frequent modification. There were additional systems built surrounding the core banking function to support different processes.
Source: Banking as a living business, 2017, Accenture
Core Banking transformation is complex. It’s costly, time consuming and success rates are low. According to a Cognisant report, Understanding-Failed-Core-Banking- Projects, 25% of core banking system transformations fail without any results while 50% do not achieve the transformation objectives – costs and implementation times are double or triple. Only 25% of the transformations can be called successful. Hence, banks rightfully view core banking transformation projects with an element of caution, carefully weighing up any potential risks against the perceived value.
The larger banks have been adopting an agile approach across both their front-end and back-end systems and are moving away from the two speed IT. They have the money and the appetite to take up the transformation journey and have been adopting different approaches based on their specific requirements and organisational goals. For example, BBVA rolled out digital core banking in the US. A digital core enables third parties to access existing bank customer data and onboard new banking customers, allows multiple third parties to read and write data to the same customer record, and also enables customer record to be accessed / updated in real time.
In another example, Westpac, who had been using Hogan (core banking), has moved all its core banking applications into its brand new private cloud environment. They are also building a new digital banking platform to offer “Banking as a Service”, leveraging cloud-native technology from UK-based 10x Future Technologies. The new digital banking platform allows the bank’s partners to offer banking products and services, such as transaction accounts, to customers. In fact, they have onboarded Afterpay as the first partner on their new platform. While partners such as Afterpay will manage the look and feel of the customer experience, Westpac – as the licensed authorised deposit-taking institution – will hold the direct banking relationship with end customers.
Banking to cloud and focus on innovation around customer. NAB Digital Strategy accelerates shift from in-person banking to Online. It announced that small regional branches would be open only from 9.30 am until 12.30 pm and all support outside this period would be via digital and phone banking. In terms of innovation around customer, NAB has introduced multiple digital banking features recently such as online cheque deposit, iMessage chat support, restriction of gambling transactions, WhatsApp chat support, voice recognition authentication and partnership with Pollinate to bring insights to small businesses.
ANZ is building a new banking platform ANZ that would be integrating with its core systems including Finacle core banking, while also providing the necessary ecosystem for innovation and improving customer service 10 fold.
CBA has already been reaping the benefits of their core banking transformation along with a shift to cloud infrastructure. In 2020 their investment in technology has continued with the partnership announcement with Klarna, the global online shopping payment company, and the unveiling of X15 Ventures, which is planning to launch 25 new customer focused businesses over the next five years.
Banks with deep pockets maintain a large UX and IT team to innovate and work continuously on consumer needs.
When looking at tier-2 banks, Bank of Queensland has embarked on a 5-year digital transformation journey with one component being the core banking replacement leveraging the Temenos platform. Another tier-2 bank, ME Bank, did a core banking transformation and migrated from Ultracs to Temenos.
It can be observed that the larger banks (tier-1 and tier-2) are trying a multitude of strategies such as moving their core banking to cloud, building a next generation platform focused on customers that can easily integrate with back end systems, and some banks are even replacing the core banking with a digital core that is flexible, open and agile.
Another point of observation is that the front-end digital experience has generally been controlled by the banks themselves (especially the larger banks), or they have heavily customised vendor digital banking platforms. Banks with deep pockets maintain a large UX and IT team to innovate and work continuously on consumer needs. Whereas, the banks using digital platforms from vendors (in particular the lower tier banks), tend to partner with their provider in collaboration and innovation to meet their consumer needs. They are reliant on their partners / vendors to enable the digital transformation.