Last week, I attended the annual Gartner ITxpo Symposium in Orlando. This symposium brings together almost 10,000 senior executives, mainly CIOs, from various industries, as well as representatives from the technology industry.
The message for the banking industry from the symposium was one of stark warning. Gartner’s view is that the financial services industry is in structural, not cyclical, decline. It believes that the nexus of forces – social, cloud, mobile and big data – is opening banking up to disintermediation in many cores areas, as well as shrinking its boundaries. As a result, it believes that banks need to act fast – to improve their innovation capabilities, to open up their platforms, to become more digital – if they are to survive. Here is a summary of my key takeaways from the conference.
The moat is disappearing
Warren Buffett once said, “in business, I look for economic castles protected by unbreachable moats”. This analogy encapsulates his investment strategy of investing in companies and industries that can easily repel competitive threats, through the existence of strong entry barriers or sustainable competitive advantages. Banking has traditionally been similarly well protected – high entry costs, massive economies of scale, low customer switching all allowed banks to earn bumper profits through most of the twentieth century.
However, according to Gartner, the moat is disappearing. Technology changes – accentuated by other changes, such as diminishing customer loyalty and a regulatory agenda to introduce more competition – are changing the way we bank, as well as opening up the market to non-bank competitors.
Gartner says the banking industry is experiencing a shift akin to a second ‘big bang’. The change is being shaped by what it calls the ‘nexus of forces’, comprising:
- The Cloud – which is breaking apart traditional supply chains, allowing firms to compete in the provision of discrete services, rather than a full end-to-end banking service. Examples include PayPal or Simple;
- Big data – information is no longer the value enabler but is itself the value. Customers will expect banks to provide value-added services based on data, like Mint, which offers personal financial management;
- Mobility – renders banking service provision anytime, anywhere, and accessible through multiple different channels and apps. This changes the industry dynamic from economies of scale to ‘economy of access’, and it becomes a competition to own the point of customer interaction;
- Social – this places more importance on social context in the provision of banking services. The following link shows what Fidor Bank in Germany is doing to embed social context into banking: http://ow.ly/pKPSZ
While Gartner did not go as far as predicting the disappearance of traditional banks within ten years, it did predict that technology change would make all of the following bank roles obsolete within ten years: branch tellers, call centre agents, financial advisors, sales traders, reconciliation clerks, data centre managers, help desk, printing and support activities, and underwriters and brokers.
Banks waste more than retailers spend on IT
Gartner argues that, if banks are to survive through this second ‘big bang’, chief among their priorities should be to improve their innovation capabilities. To underline this point, Gartner highlighted that the banking industry wastes annually $164bn or 23% of total IT spend (defined as yielding no value), which is more than the whole retail sector spends annually on IT.
To improve innovation, Gartner had the following recommendations:
- Break down silos – the biggest single barrier to innovation is IT systems that are built in silos and teams that act in silos. Banks must work to overcome these silos. In addition, banks must make unified investments: for instance, social and mobile investments should not be made in isolation.
- Make concentrated bets – IT demands are growing exponentially, so CIOs should not try to scale infrastructure and operations indefinitely for every service. Instead, they should pick the real value-added projects and stop/limit support for others;
- Use business cases – too many projects start without the business goals in mind and few projects are tracked against them. This is essential;
- Pick the right comparators – to benchmark themselves, banks should pick best-in-class vendors and not just from the banking industry. Similarly, they need to put in place mechanisms to track pioneering innovations from across sectors;
- Challenge the received wisdom – while most banks are cutting expenses across the board, pioneers are shifting spending from other areas to fund increases in IT.
The music industry ignored the way people wanted to consume their products
Banks need to open up their platforms if they are to offer banking services in the way customers want to consume them, and if they are to foster more innovation. The precedent, Gartner argues, comes in the form of the music industry. Napster showed that customers wanted more control over getting what they wanted (in this case, individual songs as opposed to whole albums). The music industry’s response was to get Napster shut down, rather than to innovate to meet customer demands. The result was that, after Napster, came iTunes.
Banks should ignore this precedent at their peril, and must embrace innovation and open up their platforms. Opening up their platforms means, in practice, two things:
- making available APIs so that partners can develop banking apps and ancillary services to extend the bank’s innovation capabilities at the same time as potentially creating new revenue opportunities
- opening up app stores, so that the banks can help consumers to discover the apps, and to prevent fraud, only allowing bon fide apps to be made available.
Gartner predicts that by 2016, 50% of banks will have launched an API platform and 25% of banks will have launched a customer App Store.
Becoming more digital
To quote the Economist Intelligence Unit, “Simply put, there are no alternatives but to become more digital with whatever assets are available.” Gartner certainly shares this view. It defines digital banking as banking services made available over all multiple channels and contexts.
To become more digital, however, requires banks to engage in a very different mindset. Gartner offers the following tips:
- Innovate not replicate – to become more digital, it won’t suffice to replicate and drag business models and processes that we appropriate for an analog world into the digital
- Don’t be technology-led – the thinking must start by identifying customer needs and working out how to add value. This decision should determine what technology is needed and not vice versa;
- Accept the diminished role of the CIO – in the digital world, much of the CIO budget will fall under other departments, such as marketing, In addition, Gartner sees the rise of new roles such as Chief Digital Officer which will assume parts of the CIO’s existing role;
- Use partners – banks will have to embrace partners to innovate and to meet customer needs. This may involve potentially giving up some revenues in the short term, but is key to long-term survival and opening up new revenue streams;
- Don’t ignore non-digital customers – while there is an inexorable move towards digital, there will always be customers who remain analog or inbetweeners;
- Integrate location but maintain customer trust – being able to integrate location into banking services – digital wallets, etc – will be critical in the fight to win and retain customers. But it is a balancing act and individuals’ privacy must be respected;
- Be precise – digital banking services need to be well targeted, meeting precise and discrete customer needs;
- Become data experts not data custodians – banks have so much data, but they do so little with it. The focus should move to doing more with less. It is liability to hold and keep secure so much data, so banks might want to consider keeping less. With what they have, they must drive value for themselves and their customers.
The battle is not for payments per se, but for the wallet
The market for digital wallets is already heavily contested. A look at the broad landscape reveals a large number of players, including heavyweights from many industries, such as technology (e.g. Apple, Google), retailing (e.g. Amazon, Starbucks), payments (e.g. Visa, Mastercard) and, of course, banking (e.g Barclays). But banking is already playing catch-up. A recent Gartner survey of US consumers found that banks came fourth in terms of preferred suppliers, behind Visa, PayPal and Amazon.
Why is the digital wallet market considered so important? Well, because digital wallets provide the gateway into payments. They represent the point of customer interaction. And so it is all about establishing loyalty and owning the customer relationship. Processing the payments is, and will become, more of a commodity (as evidenced by falling fees per transaction). So, banks must compete hard in the digital wallets space, to avoid losing the customer relationship.
What is a digital wallet? Gartner defines a digital wallet as “an application that stores or accesses personal credentials – payments cards, loyalty programs and other sensitive data” The credentials are stored on a device or remotely accessed by a mobile phone, a tablet computer or a laptop/desktop.
Many of Gartner’s recommendations for banks regarding digital wallets are common to the previous section on becoming more digital, especially around innovating not replicating, partnering and not being technology-led. However, here are some other takeaways:
- Quality of the user interface will be a key battleground – digital wallets must be easy and intuitive to use; they must authenticate the customer securely but simply and quickly. Quality of UI and ease of use will be more important than functionality
- Customers will hold multiple digital wallets – banks should not see it as a failure that customers hold multiple wallets. In fact, trying to compete across all digital wallets segments will dilute efforts too much. Just to be one of many digital wallets will be a success and will depend on identifying real value-add.
- Loyalty and account management services will lead payment – the payment method used will reflect the greatest reward available to the customer; increasingly digital wallets will embed location and context. Digital wallets will become digital payment advisors
- Key role in future use of social and virtual currencies – a key value-add in future will be to blend loyalty points, social and virtual currencies with traditional currency at the the point of sale to fund purchases