Retail Banks Feel the Heat From New Competitors

The evidence is multiplying, hard to ignore… Alternative players in financial services are shaking up the status quo, leaving traditional bankers feeling the heat from unprecedented competition.
Alertnative Threats
71% of surveyed bank executives in the US admit their retail banking business is threated by non-traditional competitors, according to a recent Price Waterhouse Cooper report (entitled “Retail Banking 2020”, published 3/11/14). The survey includes 560 respondents from leading banks in 17 countries.

This is a powerful admission, and certainly provides a massive wake-up call for retail bankers. The PwC survey also asks these bankers to think ahead about ways to improve their competitive position: which areas represent top investment priorities for their banks? The survey finds that 43% of the American respondents identify “improving customer service” as an important area for investment, and 30% point to “implementing new technologies”, both key areas where non-traditional competitors are making game-changing inroads.

A similar message comes from the Harvard Business Review : “Accenture estimates that competition from non-banks could erode one-third of traditional bank revenues by 2020.” (www.blogs.hbr.org., 2/20/14). This blog addresses the challenge faced by traditional banks from non-banks, which are aggressively taking control over more of the banking value chain through digital innovation.

New Challenges

This is a whole new world order we’re seeing unfold. A big driver for change comes from the advent of digital and mobile technologies, which new competitors are using to great advantage. Mobile payment innovators like Paypal and Square (working with Starbucks) have paved the way for easier financial transactions, and they’re being closely followed by others like Google Wallet, Facebook, and telcos, such as T-Mobile. The possibility of Apple’s likely entrance into the global payments market, with its 800+ million ITunes account holders, is leaving retail banks and credit unions shaking in their boots.

One of the most fundamental issues for banks is that these new competitors are pushing customers’ relationships with their banks into a back-room, commodity status. Increasingly, consumers will be focusing their primary payment relationships with the non-bank tech innovators, which in turn threatens to siphon off trust, attention, and consumer information for the new middleman, eroding the bank’s brand in a big way.

What to do?

Banks will need to figure out where they can most clearly add value back to the customer experience, and innovate to stay relevant. Rather than serving as simple commodity clearinghouses, banks should be taking advantage of the customer information they hold to better understand consumer preferences and interests.

Bold banking innovators could play a bigger role as consumer advisors, helping customers become aware of financial options they might not have previously realized, and providing helpful information to improve the quality of the consumers’ decision making about those options.

• Imagine a helpful (digital) personal assistant from the bank that alerts you to special deals or offers that are now relevant (based on your geography, or time cycle, or recent investments, or value of your holdings).
• Or maybe the bank’s personal assistant could provide gentle reminders about how new purchases might impact your financial holdings, and your longer term financial goals.
• The key issue is for banks to become relevant to their customers, and to add significant value to the customers’ experience.

Innovation is critical

Looking back at the PwC survey results, it’s striking to find that 97% of responding bank CEOs see innovation as a key priority for growth, yet only 10% of CEOs see their companies as innovation leaders. How to bridge that gap?

One of the survey’s suggestions is to pursue agile development. “Banks need agile product and technology development skills – to bring new products and capabilities to market much quicker than today. This requires continual iteration, real-life pilot testing and rapid learning from customers. This does not require writing and rewriting business requirements documents, 12-month product release cycles, or technology organizations far removed from the customer.” (PwC, Retail Banking 2020, p. 37).

Obviously, if banks don’t have the current skills and talent needed to deliver this innovation today, they should consider working with trusted partners to jumpstart the process, and start driving for differentiation before their market opportunity closes.

Nagarro is a respected IT services partner to consider, having contributed to the financial services industry for years. Nagarro’s global client base appreciates the company’s technical expertise, agile deployment, and bedrock commitment to customer service.

What's your take

Are you seeing the same issues for your retail bank or credit union, regarding the growth of alternative competitors? What are the biggest problems you’re facing, and how do you see the retail banking industry adapting in the coming months?