It’s not crazy to believe that the banking sector is about to witness a wave of disruptive innovation on an unprecedented scale: it feels like we’ve been promised ‘next generation banking fit for the next generation’ for quite a while now. Maybe even for a generation. So where exactly will this revolution come from?
While digital challengers from Atom to Monzo and Clearbank seem poised to offer a more personalised, intelligent way to manage our money, they each own less than a 2% share of their market. So far there’s little evidence of these challenger banks disrupting the steady world of banking. Get past Atom’s nifty facial recognition and you’ll find a bog standard set of fixed term savings accounts and digital mortgages. Monzo’s ‘banking like never before’ really means a routine current account with a nice smartphone interface.
There’s a crucial difference between genuine innovation and gimmickry: insight into the user. And it’s difficult to see much evidence of insight in the way challenger banks are currently innovating.
A bigger threat might come from big tech giants like Amazon. According to a Bain&Co survey, 65% of Amazon Prime customers said they would sign up for a bank account with Amazon while 43% of non-Prime customers would follow suit. Comparing the modest average Net Promoter Score of major UK banks – around 15 – to Amazon’s – which is 47– no doubt the e-commerce company has the customer-satisfying muscle to worry traditional banks.
The generational time bomb
Our attitudes and behaviours towards money are intimately related to our sense of identity and remain stubbornly resistant to change. That’s not to say people can’t change; only that we change at a pace that suits us. We’re learning to love contactless and mobile forms of payment, but we’re a long way from digital banking nirvana. The problem is that people are terrible calculators of risk and don’t deal well with uncertainty. Many of us struggle to plan for next week let alone retirement, and banks – even flashy digital banks – make some of us suspicious.
A 2018 YouGov poll found 66% of adults in Britain do not have faith in banks to work in the best interests of society. Yet, trust and transparency are critical drivers of customer satisfaction and loyalty, especially when aggregators and open banking regulations are making it easier and easier to switch bank accounts. This is where outside-of-category players might have a competitive edge over traditional banks and fintech companies.
A generation ago a 30-year-old might expect to be well on the way to owning a home and a car and starting a family. Today, the financial pressures faced by the millennial generation mean that plans for home ownership, car ownership, marriage and children have to be delayed or abandoned, while the relative wealth of older generations has meant many peri-retirees are now experiencing a second wind. Banks are in an ideal place to build on the data they hold on their customers to personalise their products and offer bespoke advice and financial education to bridge this widening generational divide.
It’s a sobering thought for any ‘next generation’ bank, and the need for genuine innovation in banking has never been greater – we have a generational time bomb to defuse.
How to create long-term innovation
We need a radical re-think of what innovation in banking is about. There’s a lot of exciting areas of opportunity for big innovation including data as currency, open banking and the circular economy. Writers like Mariana Mazzucato are prompting this generation to ask fundamental questions about what value means in society – banks and other FS companies will increasingly have to demonstrate that they aren’t getting rich by extracting value from those who create it, but genuinely add it themselves. To accomplish this, they will need a ‘clear defendable territory’ that articulates what value they aim to create, who they will create it for and why.
Again, Amazon might teach us something here: their platform strategy, which essentially takes advantage of the digital economy to effectively harness the power of communities, could be an interesting model to apply in the banking sector. Starling bank recently introduced their ‘banking as a platform’ strategy which offers different businesses the ability to use Starling’s infrastructure to sell their own banking services. While the experiment is only just beginning and lessons are yet to be learned, putting customers at the centre of a financial ecosystem and connecting banking to a wider range of services seems the right way to go.
