It has been said many times that you don’t need a digital strategy, you need a strategy that is digital. This is a phrase which has shown to be true in a number of sectors and although Banks have been trying to keep up, today’s customers are used to engaging directly and immediately with retailers, and expect their needs to be anticipated across a range of products and services. They look for similar responsiveness in their bank as they do in their social media; and they won’t compare the mobile app to another bank’s, but to Facebook, Amazon or Uber.
The core competitive advantages that banks have previously employed to disarm new entrants have also been weakened, as their access to cheap funding via current accounts and their ability to cross-subsidise loss-leaders wanes in the shadow of new technologically-enabled competition. ‘Supermarket data driven’ or ‘online only’ Challenger Banks don’t need to offer the complex products of the ‘Big 6’ to take a market share of the current account or savings market.
It would seem therefore that the challenge for established banks does not lie in a single new entrant or model emerging to dominate their market. Rather, the risk is that the combination of smaller challengers across various products will steadily erode their core markets, which will result in a more competitive banking sector. So, understanding and anticipating these threats is therefore key to retail banking’s long-term profitability.
The new entrants are agile enough to adapt to new technology or, in some cases, have been set up specifically to use them to their advantage: for example, Atom Bank, Tesco Bank or Starling Bank. Their hope is that competition from traditional banking institutions will be muted as they repair their damaged balance sheets and reputation. Start-ups with experienced bank management teams have found it relatively easy to secure investment on this premise and have been successful. Traditional banks, on the other hand, struggle to update their back-end technology while maintaining the stability required to service their current market share.
Independent aggregators, like MoneySuperMarket.com, have positioned themselves as the go-to place for the cheapest or best products, supported by the provision of ‘best buy’ comparison tables and the network effects of the Internet. Such aggregators are looking to optimise customers’ financial holdings by analysing purchasing patterns across their customer base. This will undercut the competitive advantage that banks have historically enjoyed from privileged access to customer data; there is now a large, and growing, market for smaller banks and building societies who don’t have a national branch network, but who want to offer products to a nationwide market. This point also touches on the Supermarket banks who hold a huge amount of customer data on spending habits, which can be used to tailor their products and marketing far more than a bank has ever been able to, in addition to feeding trade back into the parent retailer.
The FinTech revolution and emerging business models, e.g. payment specialists like PayPal and Square, are using new technology to re-invent key elements of financial services, which will no doubt continue at an exponential rate to chip away at the edges of the banks’ markets. Another example of such technology-led disruption is the rise of the P2P ‘lenders’ – or exchanges – which bring borrowers and investors together in a highly cost-efficient manner. Although, it will be interesting to see how these cross-border lending activities are regulated, particularly from an AML and Financial Crime perspective; it would appear to be difficult to prosecute a website in the same way as you would a bank trading with a blacklisted country or group. Finally, as we have seen with Apple Pay, tech titans could enter the fray and, at least for specific markets, such as payments or unsecured lending, could also erode the establishment’s grip on the market. Of course, the real danger here is not that Google or Apple will one day support a banking subsidiary with a huge balance sheet. It’s that by innovating around it in support of their own core business, such a player could fundamentally undermine the traditional integrated bank business model.
Many of these trends are already fairly established but it will be interesting to see how they continue to disrupt the banking sector. I am keen to hear your thoughts on the challenges faced by the ‘Big 6’ UK Banks and how they can work to mitigate the erosion of market share by challengers in 2015.
Mike Smith is the Client Services Manager at BrightPool.