The final Digital Banking Club debate of 2015, hosted in London, featured panellists from both established and challenger banks, as they discussed where digital would take the financial sector and if institutions are doing enough to fully realise digital’s potential. Alexander Atkins writes
The Digital Banking Club’s final debate of the year saw a wide variety of answers and opinions to the major question that is circulating the financial world today of ‘How far will digital go?’
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A recent report by McKinsey reported that only 20 to 40% of customer experience has been digitised by retail banks suggesting that the established banks still have a long way to go in terms of digitisation, and are begging the question of where the opportunity for growth will come from.
Simon Cadbury, Director of Strategy and Innovation at Intelligent Environments, was quick to agree with the statement that digital adoption still has a long way to go, stating that in the last twelve months, only one quarter of all current accounts taken out have been taken out through digital channels. He further stated that 58-62% of people are now managing their accounts as an individual digitally, whilst only 30% of the UK has adopted mobile banking.
In terms of the opportunities from digital growth he said: "We’ve seen a lot of interest in mortgages, in self-serving mortgages, lots of interest in areas that have been untouched so far, such as vehicle and asset finance, insurance and private wealth."
Digitisation vs being natively digital
As to how this digital disruption would change the traditional banks, Alessandro Hatami, an advisory board member at Advanced Payment Solutions, believed that there is going to be a profound change in how banks would look in the future because of changing customer adoption.
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By GlobalData"Customers feel increasingly comfortable in accessing financial services through these digital devices and people in this country are extremely supportive of digital as a means of engaging with banks," he said.
"But what must be asked now is if I was to build a bank today, would I design it as a traditional bank but in a digital way or design something that’s completely different? What a challenger bank can bring to the table is addressing customer’s three basic needs which are that they need to pay someone, they need to borrow something or they have too much and want to protect it," he added.
This comes after Anthony Thomson, the co-founder of Atom and Metro Bank, released a forecast stating that in two or three years, the established players may not exist in the same way as we recognise them now.
Tom Blomfield, CEO and founder of challenger digital bank Mondo, was of the same opinion. "I totally agree. I think the really interesting future of banking is about data and identity," said Blomfield.
"But I think within that digital space, you’ve got talk of digitisation versus being natively digital and that’s really important because some digitisation of processes only means you take one or two steps forward. But having to fundamentally rethink what banking is and then build from the ground upwards – that is the real challenge."
As to what this new bank should be offering, Blomfield agreed that simplicity was key: "By offering a very simple service that you can sign up to quickly, store your money, pay people, pay bills, pay friends, that’s all it is."
The right time for challengers
With new challenger banks appearing more often now, the question over timing for new entrants was raised.
Chris Gledhill, CEO and founder of digital challenger Secco Bank, thought that the timing for new challengers to enter the market was almost perfect.
"We’ve got a progressive regulator, we’ve got London which is the fintech ground zero and we’ve got a load of very good start-up technology," he said.
But Gledhill was quick to differentiate between challengers following traditional methods and challengers doing completely new things.
He said: "There are plenty of challenger banks but from our point of view they are not really challenger banks, they’re like start-up banks doing the same thing as traditional players, just in a more agile way."
Outgoing head of group innovation at Nationwide, Daryl Wilkinson, also believed now is an exciting time for challengers. He justified the reasons for his setting up Lab12 Innovation, explaining that current banks and challengers had approached him for help.
"A number of current banks came to us asking how they should translate their physical branches into online and mobile. And a few challengers also needed help with scale, structure, talking to the regulator and we realised there’s a lot of opportunities here," he explained.
From another perspective, digitisation cannot be limited to specific sectors of the financial industry as Rhys Berry, director of collections technology and operations for Santander, explained. He stated that the collections industry had experienced little digital change in the last twenty years and was still going through the same processes, trying to replace systems that worked well in 1997.
He added: "The other challenge with collections is regulatory change and how to digitise a process when the regulator is redefining what that process is, it’s a practical issue."
The role of branches
The question of what role branches will play in the future of banking has been asked frequently and was sure to come up.
Wilkinson was quick to challenge the idea that branches are dead and have no role to play any longer. "They serve a purpose, they are converting people, and they’re an educational resource," he said.
"So it’s not about should we have them or not. You’ve got them, so how can we utilise them better and the first thing to do is to stop thinking about them as branches," he added.
Hatami, however, was sceptical that banks would see past the bottom line to make the transition within branches.
Hatami said: "It’s about how you build transition, because transition requires investment and a rethinking of the way you do business and looking at banks today, do they have the appetite to make that transition when they are doing alright now?"
The focus on branches also put the spotlight on the two challenger speakers, Gledhill and Blomfield, digital challengers with little apparent need for branches.
Blomfield asserted that the majority of Mondo’s customers wouldn’t need to access a branch, but for that ‘one in 1,000 customers who has a cheque from their granny and needs somewhere to put it, we have a box somewhere that you can put that cheque in’.
Gledhill stated that Secco wouldn’t have a physical channel in the traditional sense. "In Secco, the customer’s smartphone is essentially their bank," he said. "They can just as easily become an ATM to other customers just walking around."
Asked whether they felt that some sort of human contact was needed, Blomfield conceded that there certainly is still a need for it, but that it is done in the wrong way.
"Being able to talk to someone is very important but you can provide that without a branch. Often you go into branches to talk to someone about a specific product and they say you can use the phone over there, and this is a result of banks being complacent because historically they’ve never been challenged," he said.
He continued to talk about how most processes didn’t need human contact but were made complicated through digitising the traditional processes, such as account opening, which he asserted should take thirty seconds and could be done not in-branch, but on the smartphone.
Blomfield brought up a useful example of Blockbuster versus Netflix. "Blockbuster had a huge market share and loads of branches and when the internet came along, its version of digitising was to post people their DVDs. Meanwhile, Netflix came along as a truly digital business and took most of the market," he explained.
"It’s figuring out what a branch should be there for and what services do our customers want and then asking what is that transaction going to look like and how do we get there?" said Berry, reiterating the point that branches needed to evolve.
Blomfield, continuing on the theme of the simplicity a digital bank could offer said: "I feel like we’ve only seen 5-10% of what digital banking can really be. Right now it’s a statement with a list of transactions that’s two days out of date on your mobile, but that’s not mobile banking, that is your statement on a mobile. There is ten times more we can do with data functionality."
Use of cash and Apple Pay
The debate then turned to whether the big banks and challengers could team up to tackle this digital future. Whilst Blomfield was adamant that a challenger should aim to stay away from the reputation associated with big banks and ‘turn down the offer’, Hatami offered a different view.
He said: "There’s nothing wrong with a big bank buying a start-up. All they are doing is adapting their business model and making investments in the ideas of the smaller challengers so that if they succeed then they have their beta bank."
Gledhill did not seem hostile to the idea but pointed out the danger of non-banking players using challengers as a way of getting their foot in the door.
The subject of the role of non-banking players in innovating inevitably led to Apple Pay and what it has brought to the table. Cadbury was quick to state that the stats show it still has some way to go.
"Apple Pay adoption in the US is at 1.6% and it’s a great sign of where things are going, but it comes back to the issue of cash," he said.
He added: "Cash still represents 60% of transactions in the UK and I suppose the thing for the start-ups is that every time a customer needs an ATM, they are going to incur an ATM fee of whatever amount of pence just for a cash withdrawal.
"We’ve got other banks here such as Bank of Ireland or Sainsbury’s Bank and one of their biggest revenue streams is their ATM network."
However, Blomfield asserted that, despite the continuing high use of cash, Apple Pay had begun a process that could lead to digital payments, something that would add to the strength of digital-only challengers.
"The main challenge to going cardless is that you have to get the merchants to adopt it as well as the customer. You need very high adoption rates to achieve success and I think Apple is one of the few companies in the world who can achieve that," he argued.
Few seemed to doubt that Apple Pay was a serious disruptor and that a key strength lay in being a non-banker as Hatami argued: "The other thing about Apple Pay is that it does not care about financial services. It just wants to sell products."
Regulator: help or hindrance
The debate then moved onto the role of the regulator and whether they had been a help or a hindrance in digitising banking.
Blomfield held the view that there had definitely been improvements and said: "The number of new challengers in this market is growing, so there has been some movement. I think that they are worried about the possibility of a new challenger failing on their watch but I think we need to accept the possibility of some new banks failing to really push innovation further.
"Ultimately, the net result will be beneficial for customers because you try lots of different business models, and while many fail, a few succeed."
Wilkinson agreed with this, and stated he believed they were beginning to understand their changing role.
"I think the regulators help in hindering the potential for poor business models to emerge under their watch that impact innovation in a different way. But I think they have recognised that they are hindering and the conversation they need to have now is about how they can improve and disseminate their support better," he said.
However, Hatami reminded everyone what the actual role of the regulator is and why they exist.
He said: "We must not forget that these guys are there to protect the financial well-being of the whole population and if they get it wrong, the cost is not just a few pennies, you might lose your livelihood, your savings, so they have to be very strict."
Rhys Berry concurred with this, talking about how the regulator was going through a lot of challenges trying to keep up with such a changing industry and, at the same, was consistently under pressure to both help and protect the industry.
However, he believed that it will only be a matter of time until the regulator can get comfortable with business models that fintech start-ups are bringing to the market.
Finally, the question of where digital would be in ten years was put to the panel. Simon Cadbury believed that the 50s relationship model of banking where the banker knew the customer personally and anticipated their needs will be gone but replaced in a digital way so that technology will help people to understand the vision of what one’s needs are, underpinned by the ability to make contact digitally.
He added: "I think people won’t be going into branches, it will be fully digital, but I do think some form of the human element will remain."
Hatami focused on how data would bring the customer and the bank closer together so that they would both know much more about each other and stated: "I see a future where banking is a service that is an extension of me through whatever means I choose at that point in time."
Gledhill concurred on the importance of data: "People will start to realise the value of their data and they’ll start using banking to invest their data. We’ll start to see people realising the value of their information."
"I think digital will go all the way" asserted Blomfield, stating that the process of digitising would kill the incumbent banks.
Furthermore, he believed that data would be the key to providing a digital relationship with the customer that covered all their needs.
"I think we have only seen about 10% of what is possible with data usage," he said.
Daryl Wilkinson was in partial agreement believing that digital would kill the current banking model.
"I think we’ll see some of the incumbent banks become utility providers and I think some banks are already having the conversation now, asking how do they become a utility," he said.
Finally, Berry concluded that the banking model will change hugely. "Banks will look to digitising as a means of reducing costs and I think they will have this issue of how they leverage digital to reduce their costs versus the test of having to reinvent as a proper challenger," he said.
"As a result banks will have a spate of partnering up with small firms to help them reinvent themselves whilst at the same time pushing a very slow digitising process as a means to reduce costs," he added.
The conclusions differed slightly and the opinions throughout the debate varied.
What did emerge, however, was that digitisation is changing the financial industry and the players will have to change with it. As for how far digital will actually go, only time will tell.
