Digital disruption in the banking industry is something that’s gradually been gathering pace in recent years, but it’s about to get much more prevalent. Enter the GAFAMs. Google, Apple, Facebook, Amazon and Microsoft – the big five global tech companies that have made their presence known by expanding their customer offering and disrupting multiple industries in recent years. In the world of finance, Amazon has just made headlines following the announcement it’s investing in a digital insurer, while Facebook has secured an electronic money license in Ireland.
Banks beware. PSD2 has allowed GAFAMs to access customer data with their permission and use it to provide innovative solutions to their needs and the issues they face when it comes to banking. The GAFAMs have enviable digital prowess and knowledge, not to mention near-limitless funds. Combine this with data-rich customer insight and they could easily change the face of banking forever. So how will this affect the industry as it stands?
Could challenger banks be the underdog?
Challenger banks have been quietly but effectively shaking things up in the industry, in particular looking at ways customers interact with their bank and providing a more seamless, convenient alternative. The initial Open Banking fears that challenger banks would immediately start stealing vast amounts of market share from high-street banks have been quashed for now, but they have certainly raised standards across the board when it comes to providing a slick customer experience.
So much so that Paul Riseborough, CCO of Metro Bank has stated that it will take a while before Open Banking starts to get exciting, with real innovation approaching in “about three to five years’ time”. In contrast however, PwC revealed last year in some research that 88 per cent of the financial industry is worried they will lose revenue to disruptive innovators. While there is uncertainty regarding challenger banks, it’s more likely that GAFAMs will have more power and influence when it comes to innovation and changing how customers engage with the banking industry.
Finance and tech crossing over
The lines of relationships between financial organisations and technology platforms are becoming increasingly blurred, as China’s WeChat app has proven. Launched in 2011 with an initial concept similar to that of WhatsApp, it has since evolved into a much broader service that allows its one billion users around the world to do everything from ordering a taxi to arranging a doctors appointment, but also money transfers and other banking transactions.
Given that the GAFAMs are all heavily tech-led, if they were to establish a presence in the financial industry and introduce a similar all-encompassing product, retail banks face a further risk of falling behind in customer engagement and losing market share.
Amidst the uncertainty and potential threats brought about by GAFAMs, there is opportunity for banks to improve their innovation strategies using information they already have on their customers. McKinsey recently said in a report that banks may be at an advantage compared to the industry’s disruptors, as “customers would not find it attractive to provide third parties access to their data or accounts.” If banks can harness their data in the correct way before the tech goliaths come into view, they could strengthen their customer retention.
RBS is staying ahead of the curve as it announced earlier this year that it plans to launch a digital-only bank to complete with existing challenger banks such as Monzo and Starling. On a more international scale, a survey by PwC shows that 84 per cent of Indonesian banks are likely to invest in technology transformation over the next 18 months.
Partnerships and collaboration are also key and fast-becoming a growing trend. Software developers are being encouraged to use existing APIs to build platforms that allow financial organisations to improve both the internal and customer-facing elements of their businesses. Avaloq is a good example; its developer portal aimed at freelancers, fintechs and large banks currently has more than 1,000 developers collaborating and sharing insight with the global financial sector to drive innovation. For retail banks, it’s certainly worth taking advantage of the tech and insight on offer from external parties.
Going above and beyond
The disruptors and challengers which have already made a mark on the financial services industry have done so by going above and beyond the perceived limits of retail banking. It’s something that retail banks need to take a step back and look at to learn from.
Many are already making strides, such as a group of big banks including Bank of America, Citi and Wells Fargo reacting to newcomer Venmo marking its territory on instant transfers. They’ve partnered with P2P payments app Zelle to integrate directly with their own apps.
Instant transferring follows a wider trend of convenience that consumers have come expect from all industries. Banks can go even further by looking at non-banking services which ensure they are making more a positive impact on their customers’ lives. Whether it be the introduction of lifestyle benefits such as high-street discounts, or helping customers to simplify their monthly bills, offering add-ons that increase convenience or reward the customer is likely to make them want to stay. In fact, our ‘Connected Customer’ report shows businesses that offer three or more additional products have considerably higher customer engagement scores, resulting in customers staying longer and spending more.
With PSD2 and Open Banking making an impact, it’s all change in the banking industry and as GAFAMs enter the market, banks and fintechs need to plan ahead to maintain their presence and stay relevant to customers.
Innovation and collaboration are the two key ingredients to improve their offering and position. The introduction of GAFAMs and other new players is a healthy addition to the financial sector, as it drives positive change and competition, while customers will reap the benefits.
By Karen Wheeler, Vice President and Country Manager UK, Affinion