Digital progression in retail banking: Europe’s banks are not fully prepared
Across Europe many banks feel unprepared for the next phase of the ‘digital revolution’. However, factors such as expensive compliance regulations, poor data management and outdated systems are constraining them from implementing new solutions, writes Peter Fawcett.
The digital driving seat has a new occupant. A few years ago, technology companies were leading the digital debate with a flurry of new platforms, applications and services. Now, it is the consumers themselves who are pushing the boundaries of digital advancement as their appetite for engaging with services, such as banking, through digital platforms increases. For many institutions this can mean a struggle to keep up with the changing tides of the digital wave.
There is also an increasing fear that non-financial digital experts could move into the market soon. Recent Europe-wide research by Tata Consultancy Services found that 71% of banks believe they will lose customers to mobile or telecoms companies in the next five years. The reality is that new entrants are well placed to fundamentally change the market and they are already doing so. For example, digital-ready companies such as PayPal have the ability to selectively pick parts of the value chain in which they wish to operate. New world retailers and hi-tech firms like Amazon and Apple leverage their knowledge of the customer to give a unique user experience. The ability to provide new and exciting user interfaces, based on knowledge of customer need, is something banks often struggle with today.
Yet, it is not ignorance or lack of understanding about the consumer landscape that is preventing banks from providing better customer-facing digital solutions. Rather, it is the opposite. Six out of ten leaders from Europe’s key financial institutions believe that in ten years, optimising the digital interface will be more important than maintaining human interaction. Thus, banks are all too aware that falling behind in digital adoption will translate into a significant competitive disadvantage.
Banks can play the customer experience game too. As institutions, they have a long-standing history with their customers, and already possess large amounts of data which would take new entrants years to build. Add this to the huge amounts of data pouring in from sources such as social media, purchase transaction records, call details and GPS signals from mobile phones, and you have a powerful data ecosystem.
However, turning this opportunity to a reality is limited by the sheer quantity of information and the speed at which it flows into the organisation, making it difficult to manage. Further, in order to use this data, effective analytics systems and processes are required. Implementing such data initiatives can be costly, and factors such as expensive compliance regulations limit the funds for such projects. The financial crisis has exacerbated the regulatory challenge; the number of mandatory regulations such as Basel III and Solvency II has increased. This can put a strain on resources, with 80% of respondents saying that increasing regulatory complexity is the greatest pressure on their organisation.
In addition to the challenges of data and lack of free capital, antiquated legacy systems can often hold banks back from competing with newer, more nimble entrants, who have adopted the latest systems since inception. Accentuating this is a cultural fear of upheaval, which causes banks to focus more on short term performance measures, as opposed to investing in long term solutions such as the re-engineering of core systems.
Indeed, the updating of legacy systems is no easy feat. The accompanying problems of data migration and coexistence of old and new systems creates complexity that many financial organisations do not have the skilled workforce to manage. There is also a fear of putting existing systems at risk during the changeover process. All of this leads to legacy systems which are only replaced over a period of many years.
Despite the combined difficulties of data management, legacy systems and limited funding, there are strategies that banks can apply. Firstly streamlining their operational infrastructure can make them more efficient and effective in using their budgets. One of the ways this can be achieved is by taking the opportunity to implement new customer technologies when implementing compliance measures to make better use of compliance budgets. Investment in effective data strategies, for example, will allow banks to manipulate the ‘big data’ at their disposal, thus generating further revenues. These in turn can be re-invested in better customer solutions. Also, starting by implementing smaller and more manageable quick wins, banks can begin to make bold changes, without compromising the functionality of existing systems.
Finally, a change in mind-set is critical. Banks need to stop thinking of digital enhancement as an ‘add on’. Rather, fully integrated digital solutions and faultless customer service platforms need to become minimum requirements, rather than luxuries. The ‘Clicks and Bricks’ approach of simply supplementing physical outlets with half-hearted digital solutions will no longer be adequate as we move into the next and more accelerated phase of digital consumer adoption. A ‘Laps and Apps’ approach of leading with application and mobile device platforms should be the new way to develop digital strategies. However, it is essential these are integrated seamlessly into all customer facing channels.
The adoption of streamlined and lean business processing will consequently lead to better investment in new business intelligence and social analytics applications and data. It will be the control and analysis of this data that will allow for more sophisticated multi-channel approaches which put digital consumer needs first. Those that are able to capitalise on the ‘data rush,’ combined with their long existing knowledge of their customer activities and habits, will be the ones that ultimately survive and thrive when new entrants come to the market.