In my varied experience as a serial entrepreneur, regulatory advisor, corporate consultant and angel investor, I have witnessed the evolution of the banking sector first hand, from all of its sometimes unflattering angles. Given the latest trends in banking technology I have to be perfectly frank: Not all institutions are going to survive.
This shouldn’t come as a tremendous shock. The competitive landscape and not what is used to be and banks have demonstrated little ability to respond effectively to people’s changing behaviors and expectations or to take advantage of new technology. So after years of no competition, tech titans around the world have started to offer services that banks never even considered because that isn’t what banks do.
Unless banks are content to serve simply as utilities, they have to make major changes, fast. Here’s where I would start if I were them:
Understand your customers and forge a relationship with them
Banks have traditionally been very dismissive of their competitors, content to rely solely on their restrictive brands and heritage. It’s as though they see their customers as hostages with a virulent case of Stockholm syndrome. Tech titans, on the other hand, armed with similarly-sized customer bases, have a far more intimate knowledge of and relationship with their customers. As a result, those customers use a far broader range of services (see where I’m going with this?). Forging deep relationships also earns tech companies brand elasticity – the ability to port trust from one service to the next.
Amazon Echo and all the voice activated technologies are great examples of the importance of using technology to build relationships. Those devices are talking to you and you are talking to them, one-to-one, and at scale. The tech titans place a lot of importance on talking to people personally and have made a huge investment over a very long time to do just that. None of the big banks have the same capacity to talk to people individually, even through their branches, which are closing one by one in a slow but sure death march.
Cultivate a sincere drive to help customers, not just comply with regulations
Pervasive industry regulation provokes an ‘anaphylactic shock compliance reaction.’ Banks have just become compliance machines, compulsively reacting to regulation by complying but not giving any deeper thought to how they could leverage that “letter of the law” rule following mentality to also provide value-added services to their clients.
This compliance reaction ultimately takes control away from banks and puts the compliance people in charge. As the name suggests, they know how to comply, but they don’t know how to be creative – or how to connect with customers to solve problems. They obey the strict guidelines of the law and argue the toss about the spirit.
When you think about this mentality in reference to the recent drive to create APIs, it becomes clear that banks have painted themselves into somewhat of a corner with the approach they use. Not only are the compliance people involved, but technologists are also in the mix with this issue, which compounds the issue because technologists are even more literal-minded than compliance people -- plus they have a bit of a chip on their shoulders from years of being ignored and marginalised within large banks. Now they’ve been handed walloping great big budgets so they can find data and serve it to customers as they ask for it.
This compliance plus technology reaction is missing the point by several light years. APIs are about data and data is about people. Banks that can keep their focus on that fact and use this drive for APIs to provide customers with solutions to their challenges will have a distinct advantage.
Focus on the power of data
I think it’s time for people to wake up to the fact that APIs are not the messiah, but that data is and that data has the power to change everything we know about banking. The question is, will it, because the liberation of data has a fundamental set of implications for old-school business models.
Over the past 10 to 15 years we, as consumers, have been trained to expect things to work, for things to feel good. We have been trained to expect services that are useful to us, and for services to be suggested to us. Just take the supermarket for example. Rather than go through the hassle of going there ourselves, we can now have things delivered to us.
Data enables predictive, pre-emptive services, hyper-personalised services – exactly the types of services that customers crave. And for those reasons, smart companies have been focusing on large-scale acquisition of data. Payments data, for instance, provides insight into where people spend their money, and a strong indication, therefore, as to what they care about.
Amazon is an excellent example of this – it has better data than the banks do on the small businesses trading through their platform; it understands their cash flows, it understands the peaks and troughs of their business, and it knows when to offer money, and at what rate. It’s absolutely critical for banks to achieve this level of mastery with data if they expect to thrive in the coming years.
Change the mindset of the board
If you look at the strength the tech titans have, they have enormous chunks of money to deploy. Their shareholders demand market share and growth. If you look at the shareholder base of Apple, PayPal, and Amazon, you will see similar characteristics. Compare that to bank shareholders, who focus solely on dividends, and its clear why the shareholders of traditional incumbent banks are not a competitive advantage, as they are for the big names in technology.
The goals of the board might not necessarily seem like a big deal on the surface, but why they’re such a critical element makes perfect sense when you take a deeper look. For example, if you compare and contrast the diversity at the board and executive level of a big bank and, say, Amazon, it is really interesting to look at three core measures of diversity – education, work experience and attitude to risk. The board and top executives of big banks are educated in banking, finance, accounting and law. They have worked at banks, and accounting firms. They are company men – not entrepreneurs. And they understand banking as it has always been done. Then you look at Amazon’s board and executive team, which contains a great deal of diversity in their education, with a mix of arts and sciences. There is also a blend of work experience across a wide selection of sectors, with entrepreneurs and investors in the mix. Given that broad spectrum, their attitude to risk is bound to be entirely different. That’s why they’re creating the future we’re living in. and banks are not. “Because that’s how we’ve always done it” is no longer a mindset that’s helpful for banks. It’s holding them back and it needs to change, starting from the top, if they’re going to survive.
I’m not trying to be a harbinger of doom with all of this. I don’t want banks to fail. But I do want them to wake up to the tremendous opportunities they face and do something about it so they can be active participants in the exciting changes taking place all across the industry.
For more discussion on this topic, I’m a keynote speaker at the Banking Expo 27 November 2018 in London at the America Square Conference Centre.