I recently took part in NCR’s Innovation Conference in Orlando, where I was asked to give a session on the future of payments. Increasingly over the last few years we have seen the legacy banking sector facing challenges from a variety of emerging technologies and competitors that are shaking up what it means to be a financial services provider in the digital-first era.
Emerging channels such as mobile and online have transformed how many people seek to manage their finances, whether this is everyday activities such as making deposits and keeping track of their spending, or longer term goals such as saving for a college fund or finding the best mortgage deal. And to achieve this, they can now turn to a wide variety of non-traditional providers that can approach the sector from new perspectives and shake up established ways of thinking.
We’re now well and truly into the era of the fintechs as competitors to legacy banks, and this has naturally led to many questions about the position of legacy players in this more diverse environment. And some are suggesting that in years to come, it won’t be just innovative new startups these banks have to worry about.
A recent study by the World Economic Forum, for example, claimed that big tech firms including Google, Amazon and Facebook stand poised to transform the banking sector, making use of the huge amount of resources they possess when it comes to consumer data and processing power to offer new and compelling experiences.
Approaching a Kodak moment?
So what does this mean for the prospects of legacy banks? One of the starkest warnings concerning the future of this sector came earlier this year from former Barclay’s chief executive Antony Jenkins. He told Bloomberg that the traditional banking sector could face complete obsolescence in as little as five to 15 years as new technology providers deliver a more compelling offering.
Mr. Jenkins likened this to a ‘Kodak moment’ for the industry – a reference to the cautionary tale of the fate of the iconic camera maker. Famously, Eastman Kodak failed to adapt to the changing nature of its primary market – despite being credited with the invention of the digital camera, the company declined to pursue the technology out of concern it would impact its traditional business.
Ultimately, this worry was proved right, but Kodak’s slowness and initial reluctance to embrace the technology meant it was hopelessly outpaced by competitors and was never able to make up the lost ground. It eventually filed for bankruptcy in 2012 and today, the revived brand is a shadow of its former self, focusing mainly on printing.
But is this the fate that awaits the legacy banking industry? Not necessarily, but the lessons of Kodak certainly need to be heeded if banks are to compete in an environment that looks very different now from when their primary business models were formulated.
Beyond the Uber effect
In his Bloomberg interview, Mr. Jenkins noted that presently, the retail banking sector is in the middle of what he described as an “Uber moment”, where established ways of operating are being disrupted and transformed by new technology, such as smartphones and contactless payments.
By using a combination of new technology – including smartphone apps, GPS location services, mobile payments and advanced AI algorithms to automate key calculations, Uber was able to transform the taxi industry so radically that competitors and regulators were left behind – and consumers responded enthusiastically to the cost and convenience of the offerings, although questions about its long-term viability remain.
However, while the ‘Uberization’ of the banking sector caused by innovative fintech firms and a customer base that’s more comfortable interacting via digital channels is already proving challenging for many legacy players, coping with this could be just the start of turbulent waters ahead.
“The Kodak moment is completely different – that’s where customers realize there’s a totally better and different way of doing what they want to do, and the incumbent becomes obsolete,” Mr. Jenkins continued. “The Kodak moments are the ones that I think will come in that five-to-15 year period.”
He added said one of the biggest issues for many banks is that they do not currently have the “culture or mindset” necessary to reshape their operations to meet evolving expectations, despite the large sums that are being invested in new technology.
Perhaps the biggest concern for many banks is that the market will shift to a completely digital-only environment where traditional branches are forgotten about. In recent years, the number of digital-only banks emerging has increased significantly, and with these solutions being especially popular among younger and more affluent customers, it’s often assumed that digital-only will be the future for all retail banks.
Questions over the role of the branch aren’t exactly new. Indeed, people have been confidently predicting the end of this channel for almost 50 years. However, it is now accepted that branches will have to change their strategies in order to avoid obsolescence in the coming years, with the main change being a shift away from transactional operations to a more personal, advisory role.
Part of this will be greater reliance on self-service solutions for straightforward, and even more complex, day-to-day activities. Solutions that offer greater functionality and interactivity, with a familiar touchscreen interface, can help free up human staff for more in-depth discussions, and technology such as video tellers help ensure that even if people do encounter difficulties or have queries when using self-service options, a friendly face is just a couple of taps away.
Some argue that such solutions won’t be of much use if customers can conduct all their banking online and are thus disinclined to visit a branch in the first place. But notions that the branch itself is set for obsolescence may well be wide of the mark, particularly when it comes to the next generations banking users.
For example, research from Accenture shows that the youngest users of banking services – those currently aged between 18 and 21 – use the branch more regularly than any other group. While the number using this channel for deposits and withdrawals is falling, there has been an increase in those using the branch at least once a month to receive financial advice. With these individuals being potentially valuable customers for 50 years or more if banks can secure their loyalty, this clearly suggests there’s still a lot of life in the branch yet.
The foundations of future digital success
However, while the branch may not be over just yet, it is likely to be a secondary point of contact for many customers in the longer-term, particularly as technology becomes more ubiquitous and people gain familiarity and comfort with advanced digital solutions.
For example, while currently, many people still favor a human presence and advice when researching more complex and long-term financial products such as pensions and mortgages, advances in solutions such as AI could offer a viable alternative sooner rather than later.
Accenture’s research, for example, suggested that more than two-thirds of consumers are now willing to turn to AI-powered ‘robo-advisers’ for recommendations such as allocating investments and planning for retirement. The main positive for this, according to consumers, is their perceived impartiality, followed by the speed and convenience of the service.
It’s clear, therefore, that if banks are to avoid succumbing to their own ‘Kodak moment’, investment in technology such as AI will be key to their strategies. With digital the first, and in some cases only, way in which people interact with their banks, financial institutions that don’t get on board with such solutions will be left looking very outdated.
With consumers, increasingly familiar with what can be achieved through the likes of Google and Apple’s AI assistants and voice-activated offerings, there will be an increasing expectation in the coming years to have such capabilities in every aspect of their lives – and declining to pursue it could be a mistake as serious as Kodak ignoring the potential of the digital camera.
It was very clear from my conversations at our conference that bankers – from community banks and credit unions, to the middle and large tier banks – are becoming increasingly motivated to avoid that “Kodak moment”.