Chances are your bank is still sending you statements in the mail (or, if you’re lucky, emailing you a PDF of your statement), its mobile app isn’t full-service, and its website doesn’t understand your investment goals. Even worse, that’s unlikely to change anytime soon, because while most banks are trying to change, they’re simply too laden with antiquated technology designed before there was such a thing as the internet, let alone smartphones and social networks. And of course they’re constrained by significant regulatory compliance requirements and budgets.
What’s more likely to happen is that you will come into contact with a new kind of bank, one that offers a wide variety of services through a modern technology platform. And suddenly you’ll discover that this one service provider has other services you like, and little by little you’ll start doing more banking business on that platform, until you suddenly realize that you don’t need your old bank anymore….
If the above sounds like an article you might read in USA Today or the personal tech section of your local paper, you’re not entirely off base. It’s a reflection of how consumer expectations for service—for everything from medical care to sporting events—are changing under our feet.
According to Mark Smedley, vice president of Oracle’s financial services solutions, retail banks are at particular risk of seeing their main activities reduced to mere back-office, commodity services. They might lose relationships with their customers to nimble “fintech” competitors that more closely resemble today’s large consumer platforms than traditional banks. “The older technology is still a big anchor around the ankles of the banks’ ability to be agile,” Smedley says.
Banks Not Asleep
The fact is, however, that banks haven’t been asleep at the teller window as the fintechs snapped at their core businesses. As I wrote for The Wall Street Journal back in 2013, banks have been developing innovative technology for years by way of “savings accomplished through rationalizing systems and automating processes.” Among their efforts to reduce costs and begin responding to the modern expectations of their customers has been a massive investment in cloud technology.
Banks that have started that modernization are seeing rapid returns. Leaders have outperformed laggards in a number of significant metrics, according to the preliminary results of “Wealth and Asset Management 2022: The Path to Digital Leadership,” a study by Roubini ThoughtLab, cosponsored by Oracle.
Leaders in the financial services industry as a whole now derive 39% of their revenue directly from digital channels, and they grew market share by 9% last year compared with the year before thanks in large part to technological applications, according to the report. Banks in particular have grown their revenue by 7.6%, profits by 9.1%, and market share by 6.1%, thanks to investments in technology, the report maintains.
The advantage established retail banks maintain over the fintechs is that the fintech specialists can’t offer a number of services, such as insured deposits, and they usually offer just one type of service. Banks can offer a whole lot more but need to rethink their approaches, Oracle’s Smedley says.
The Platform Approach
One promising way forward, according to popular banking industry blogger Chris Skinner, is to create a platform, much like popular social networks, that engage consumers daily and even more than once a day. These platforms can offer not only traditional banking services such as checking and payments, but also offer services delivered by third parties the banks host on their platforms.
“Banks are trying very, very hard to get into an engaged set of conversations on a sustained basis with their retail customers,” Smedley says. “Skinner’s argument, which I completely agree with, is that part of whatever your strategic vision is, you should be curating the best use cases and services for your customers, regardless of who makes that product.”
Much in the way that Google succeeds as a search engine because it provides consumers with unbiased answers to their queries, whether or not Google itself is the ultimate service provider, banks could become the platform of choice for consumers of financial products. That is, banks could co-opt their fintech challengers and solidify their relationships with consumers by becoming the ultimate curator of financial services, much as Google is the ultimate curator of the broader web, Smedley says.
“Your customers are much more likely to be loyal to you because you’re not the only participant in this platform strategy,” he says. “These other providers of financial services are there as well. And you monetize by virtue of becoming the platform of choice.”
Once customers can find the information they need and transact business via a spectrum of services on a single platform, they’re unlikely to go looking for another partner. “That’s a new phenomenon that a lot of institutions are moving toward,” Smedley says. “And that also allows them to monetize some of the best of the fintechs without having to go and acquire them.”
Beware Tech Sprawl
As stated earlier, banks are still burdened with technology developed long before the internet and even personal computers. With the right technology partner, however, they can continue using mainframes for basic transaction processing, while continuing to transition their customer-facing operations to lower-cost cloud platforms that ratchet up their agility. They need to build new customer interfaces and ultimately the financial version of Facebook on top of an infrastructure that is proven and enterprise-ready, Smedley argues.
That said, banks should be wary of adopting myriad shiny new technologies from myriad vendors, he says. “Don’t adopt technology for technology’s sake. Adopt it because you’re moving toward a strategic goal,” Smedley says.
According to the Roubini report, which draws on a survey of more than 1,500 financial services firms and interviews with more than 30 senior executives, among the most promising emerging technologies banks are starting to adopt is blockchain, which can be used to speed and simplify payments, reducing friction in a number of transactions thanks to “smart” contracts. Banks also plan to use enterprise AI for a number of purposes, from creating automated investment advisers (101% growth expected over the next five years) to optimizing back-office functions (+92%).
Banks could eventually use blockchain as a trusted means of verifying identities, allowing them to reduce administrative steps and costs related to large financial transactions such as mortgages. “This idea is so powerful and the economics are so compelling that even though the market is fragmented now, I expect that this market will follow the arc of history and will actually provide huge economies of scale,” Smedley says, particularly via the “network effect” which requires enterprise scale.
The banks that go in this direction first will have a tremendous advantage over both their traditional and upstart competitors. The USA Today headline may read: “How Banks Became Everybody’s Favorite Platform.” Now, that would really be the day!
Michael Hickins is a director of strategic communications at Oracle.