Digitization is creating a lot of opportunities, but with those opportunities come challenges. This is especially the case in financial services, where digitization is causing noticeable disruption. Banks are going to have to make some radical changes if they want to stay profitable and relevant to a broad range of customers.
What is happening in this landscape?
- New Entrants: Banks are seeing a slow but steady disintermediation and detachment from customers, as new businesses are eating away at the retail banking client experience. PayPal and Apple Pay are examples in the payments space. In insurance, Coles Supermarket, the largest retailer in Australia, sold insurance in amounts rivaling the largest insurance companies. These new entrants, often with great customer experience, are nibbling away at the juicy parts of banking.
- Functionality: Banking functionality is becoming more embedded and integrated into third-party apps and experiences like retailers and search firms.
- Margins: Margins are decreasing, and regulation is increasing.
- Consumer Expectations: Consumers today are more interested in solving life events than buying a banking product. When they buy a car, they want to negotiate the deal, have the car delivered, and arrange for insurance and financing all through a single relationship and mobile app—and on a tablet at 10:00 at night.
This brings banks to a fork in the road. One option is to specialize in handling the back-end of the transaction and let other companies capture the customer-centric front-end, like PayPal using banks to clear payments today. Banks will probably always be the highly regulated, back-end of a financial transaction like payments. But that is a commodity play and a race to the bottom in terms of margins—and it is boring.
The other option is to get out in front of digitization and really ask how to meet customers’ needs with integrated, omnichannel, and fun services. Banks need to think more about customizing services, mining customer data to determine what customers want, and becoming even more digital. This will likely require some organizational surgery to exploit digital and put customers first.
For example, Garanti, Turkey’s second-largest private bank, decided that to successfully target new young customers, it would require a different approach rather than relying solely on its 1,000 branches to engage them. iGaranti was born, a smart financial coaching mobile app that addresses the everyday financial needs of millennials without them going to a branch.
Yes, we see a fork in the road for banks today. But most banks will need to travel down both roads simultaneously. Banks will have to be low-cost, highly regulated, very efficient and industrialized financial transaction processors. At the same time, they’ll need to reinvent their customer experience to delight customers and make banks the customers’ first point of call rather than their retailer, tech company, or telco.
This is the first post in a two-part blog series on this topic by Peter Weill, senior research scientist and chairman of MIT CISR and Stephanie Woerner, a research scientist at MIT CISR. In a related video, “Digital Disruption in the Financial Services Industry,” Peter Weill describes the forms of digital disruption that are impacting the industry.