Richard Poole of Fluxx examines how banks can remain relevant in a constantly shifting marketplace. How can they adapt to suit their consumers’ needs with new combatants also entering the marketplace?
Up until the last decade the high street banking industry was one of the few consumer-facing industries that experienced very little change. Today it has just about emerged from the global financial crisis, albeit much more heavily regulated and scrutinised than before.
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But there is something else that is finally forcing banks to haul themselves into the 21st century. The Internet, mobile devices and financial services have converged to change the way consumers manage their finances and the way they connect with their banks.
"The digital revolution will have a greater impact on us than the industrial revolution." You might expect that statement from an executive of Google, Facebook or Twitter. But this was a statement made by Ashok Vaswani, Barclays CEO of Personal and Corporate banking, at a business school talk last year.
The current landscape
At the start of 2014 there were 9,700 bank branches in the UK, which is a fall of 17% in a decade. Today high street banking stalwarts are waking up and realising the threat from the emergence of new B2C fin-tech start-ups such as TransferWise and Nutmeg, as well digitally enabled banks including Number26 and Atom Bank (due to launch later this year in Germany and the UK respectively). Banking leaders are recognising that if they do not change their business models, they may be redundant within the next decade. Take HSBC one of the world’s largest banks by assets, which opened its first branches in Asia in 1865 and recently announced that it is set to exit the UK high street.
Whilst this emerging ecosystem of disruptive start-ups certainly provides a threat, they also provide an opportunity to gain competitive advantage, which some banks are already capitalising on.
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By GlobalDataVISA is a good example; they’ve made numerous investments and acquisitions over the past few years. Back in 2012 they took a 7.5% stake in payment specialist Monitise and have also invested in Square, the secure credit card processing company founded by the CEO of Twitter, Jack Dorsey.
RBS is another example having sponsored Y-combinator start-up GoCardless to the BACS network since 2012. GoCardless is the UK’s largest provider of online direct debits, and two-thirds of household bills are now paid in this way. With a 2020 forecast of four billion transactions, it’s a strategic partnership in a growing market.
Other organisations are not only partnering with but also investing in their partnerships to secure competitive advantage. BBVA for example set up BBVA Ventures with $100m in seed funding to foster an ecosystem of innovation. They’ve since taken a stake in start-ups like Radius – who trawl through two billion data points to model SME behaviour in the US, and SumUp – a provider of mobile money solutions.
That banks are good at investing their/your money in promising new businesses shouldn’t come as any surprise – this is the easy part. The hard part is to…
Behave like a start-up
In today’s fast paced world where technology is constantly and rapidly evolving the old practice of spending two years testing, refining and developing an idea is now obsolete. Typically a high street bank takes 1-2 years to develop a new product or service before even testing it with customers.
Large global financial organisations are incredibly slow to do anything out of the ordinary as a result of regulation, complex management structures and processes. Getting them to think and create like a start-up is a big challenge. High street banks must look to embrace Lean product development principles where developing ideas and testing them early on is key.
Lloyds Bank is an example of a high street bank that has committed to investing in an organisation wide digital transformation project. To do this Lloyds had to embrace Lean and Agile product development principles.
By developing a Minimum Viable Product and successfully testing it with a small sub-set of customers, staff members quickly become more confident in the experimentation process producing an environment where innovation is able to flourish.
Whilst this sounds disarmingly simple it is anything but to make this work in a complex, matrix structured banking group.
All successful innovation projects have one thing in common – a team of innovation champions who are dedicated to developing new ideas and driving these forward. Often known as ‘Innovation Labs’, these usually start as entirely separate business units who are focussed solely on innovation and product development.
They are not involved in the day-to-day operations of the organisation as operational members of staff tend to be driven by quarterly results and targets in the short and medium term, whereas delivering enterprise wide change is a longer-term challenge.
It is crucial to get the right people involved within the organisation – the people that really want to facilitate change.
With significant budget being spent on new product and service development, communicating the work of the Innovation Lab to stakeholders is crucial if you are to gain widespread support across the organisation.
Regular quarterly updates on the progress of Innovation Labs will need to be delivered to different parts of the business from the CEO, to the marketing team, to non-executive directors and financial analysts. This is key to maintaining continued support and budget.
Culture Shift
To try and achieve that all important culture shift, high street banks such as Lloyds and Barclays are partnering with organisations like Start-up Bootcamp and Level 39. But it is also likely that companies will need to review the basis on which they reward their staff. Most corporations are structured to incentivise and reward on the basis of success. However, by incentivising staff to produce results, they will bias themselves to find positive outcomes – regardless of what they have learned in the process about the suitability of the idea for the business. Rewarding honesty is the only way to know when to move forward with a new product or service.
It’s not all doom and gloom for existing banks though – powerful brands, established distribution networks, vast troves of data and equally large investment capabilities ought to be enough to turn each incumbent bank into a ‘super-startup’ if they can master the mindset and cultural changes outlined earlier.
High street banking as we know it needs a drastic makeover, one which puts innovation at its heart to develop the product and services its customers’ desires. While high street banking is not dead, we can now see that it is not immortal either. Banking has transformed slowly over the last decade but the pace of change must increase if they are to ensure they are not left behind by disruptive fin-tech challengers.
